Skilled analysts and earnings management in Chinese listed companies

Abstract

The study finds that analyst skill plays a key factor to explain the complicated and chaotic relation between analyst coverage and external governance. We divide analysts into multiple skill groups by GMM (Gaussian mixture model) method, and explore the effect of skilled analysts on earnings management in Chinese listed companies. The results indicate that skilled analysts are significantly negatively correlated with both accrued and real earnings management, suggesting that skilled analysts play a genuine external monitoring role. Skilled analysts reduce earnings management primarily through decreasing agency costs within the company. In environments with weak regulatory by auditing firms, skilled analysts exhibit particularly pronounced restraints on earnings management. Our conclusion remains robust after considering endogeneity issues.