A Study on the Monitoring Role of Analysts and Earnings Management

The objective of this paper is to examine the monitoring role of analysts in firms’ secondary equity offering and how analyst following affects underperformance after issue. Prior studies show that firms with more analysts seem to manage earnings less, consistent with monitoring role of analysts. However, this result does not apply for a sample of secondary equity offerings (SEOs). Main results of this study suggest that monitoring effect of analysts may be weakened as managers have strong incentive to manage earnings and analysts have other incentives such as in equity offering. When I examine how analyst following affects the firms’ long－term performance, I find the evidence that firms with more analysts show less performance than firms with less analyst following. However, it is still not clear why this appear. Overall, I provide indirect evidence that analysts do not see through earnings management before equity offering and thus they play a critical role in spreading out manager’s optimistic view of the market around SEO.