The effect of analyst coverage on accounting conservatism

Purpose – This study examines whether high analyst coverage increases or decreases accounting conservatism. Design/methodology/approach – This study selects sample firms from the Compustat and I/B/E/S databases for years 1989-2006. We use both accrual-based and marketvalue-based measures of accounting conservatism. We also use the extent to which negative cash flow from operations is more timely recognized via accruals than positive cash flow from operations to measure accounting conservatism. The regression analyses are conducted to test the hypotheses. Findings – We find strong evidence that analyst coverage is positively associated with accounting conservatism. The results suggest that firms choose more conservative accounting methods when they are followed by more analysts than when they are followed by fewer analysts. The results are robust to a battery of sensitivity analyses. Originality/value – This study sheds light on how analyst coverage affects firms’ accounting choices. We extend the limited research on the monitoring role of analyst coverage. Our findings are consistent with the notion that analyst coverage plays an important corporate governance role in the financial reporting process. This study also adds to the literature on the economic determinants of accounting conservatism, and provides some implications for practitioners.