Analyst Competition and Monitoring:Earnings Management in Neglected Firms

Laura Lindsey and Simona Mola

Abstract:

We investigate the analyst monitoring role using a sample of firms that lose and later regain analyst coverage along with alternative samples where loss of coverage is exogenous. Relative to otherwise similar firms that maintain coverage, dropped firms reverse earnings management from managing downward to upward, and firms that do so are more likely to regain analyst attention. After resumption of coverage, upward management is attenuated only for firms regaining coverage by multiple analysts. Our findings demonstrate that analysts select firms engaged in more aggressive reporting and suggest that the monitoring role is activated by competition rather than coverage itself.