Does analyst coverage enhance or curb earnings management The impact of mandatory IFRS adoption

Abstract

This study aims to investigate the effect of external corporate governance mechanisms on earnings management decisions. In particular, this study examines the effect of analyst coverage on the magnitude of discretionary accruals in the UK context. In addition, this study examines the moderating role of mandatory International Financial Reporting Standards (IFRS) adoption on the relationship between analyst coverage and earnings management. By using a sample of 9,165 observations collected from 1,401 specific UK firms from 1994-2013, it is found that a high level of analyst coverage can be considered as an external governance mechanism that controls managers' behaviours. The results suggest a significant negative effect of analyst coverage on earnings management. I also find some evidence that the mandatory adoption of IFRS does lead to lower earnings management levels. Contrary to expectations, IFRS fails to enhance the monitoring role of financial analysts in detecting and deterring earnings management.