Analyst Coverage and Earnings Management Using Classification Shifting

Abstract

This study examines the association between analyst coverage and classification shifting. Prior studies on external monitoring factors and classification shifting provide mixed results: international studies (Haw, Ho, & Li, 2011;Behn, Gotti, Herrmann, & Kang, 2013) find that external monitoring factors mitigate classification shifting, while Abernathy, Beyer, and Rapley (2014) find that external monitoring factors promote classification shifting when accrual-based earnings management and real earnings management are constrained. Using a sample of firms in the United States, this study finds a positive association between classification shifting and an external monitoring factor: analyst coverage. This result suggests that when higher analyst coverage has a stronger monitoring role in earnings management, managers are more likely to use classification shifting. The implication of this study should be of interest to financial analysts.

Firm Value Effect of Managerial Ability and External Control Mechanism: Mediation Role of Financial Reporting Quality

“…Foreign ownership acts as a monitoring mechanism that aims to ascertain whether the manager (agent) has acted in accordance with the company's objectives. The audit process is one of the corporate governance mechanisms that provide guarantees for stakeholders in the financial reporting process [20]. The function of the auditor is to ensure that the financial information presented meets accounting standards.…”

The Association Between Audit Quality and Earnings Management Using Classification Shifting

“…On the other hand, Francis and Wang (2008) conclude that there is no systematic difference in terms of earnings quality between the companies audited by the big four auditors and the companies audited by non-big fours in the countries where investor protection is weak. Zhao (2012) examined how different external control and monitoring mechanisms relate to use of classification shifting to manage earnings. As a result of the empirical evidence provided in the study, Zhao (2012) concluded that the companies are more likely to use classification shifting in earnings management, depending on the increase in the level of external audit or the quality of external audit.…”

“…Zhao (2012) examined how different external control and monitoring mechanisms relate to use of classification shifting to manage earnings. As a result of the empirical evidence provided in the study, Zhao (2012) concluded that the companies are more likely to use classification shifting in earnings management, depending on the increase in the level of external audit or the quality of external audit. Barua and Zhao (2014) find that audit quality measured by big four auditors and industry expertise of auditors was more related to classification shifting.…”