Analyst Coverage at Industry Level and Earnings Management

This paper examines whether sell-side analyst coverage at industry level impacts earnings management. We provide evidence that: 1) firms are involved in more upward earnings management but less downward earnings management when they belong to an industry with a higher level of analyst coverage, and 2) the effect of analyst coverage at industry level on upward earnings management is stronger when firms receive less analyst coverage at firm level. This study extends the previous research illustrating that a higher level of analyst coverage at firm level reduces earnings management due to analysts’ monitoring role and finds that industry level analyst coverage provides firms pressure for better performance, which results in more upward earnings management. Our findings suggest that the effect of analyst coverage at industry level is contrary to the effect of analyst coverage at firm level. More specifically, the pressure effect of analyst coverage on earnings management is stronger at industry level than the monitoring effect. In addition, we show that the magnitude of the effect of analyst coverage at industry level depends on analyst coverage at firm level