Supply Chain Analysts and Real Earnings Management

In this study, we examine an unexplored role of supply chain analysts (SCAs), who simultaneously cover suppliers and their major customers, by investigating these analysts’ role in curbing the real earnings management (REM) activities of the firms they cover. Using a firm-year sample of Chinese A-share listed suppliers and their top five listed customers from 2008 to 2018, we find evidence that, compared with non-SCA-covered firms, firms covered by SCAs exhibit lower levels of REM, particularly lower levels of sales manipulation. Results from cross-sectional analyses suggest that the effect of SCAs on REM is more pronounced when the covered firms are suppliers, and when suppliers and their customers belong to the same industry. This implies that the effect of SCAs on REM is greater when SCAs’ monitoring ability is stronger. In terms of firms’ likelihood of REM (i.e., SCAs’ monitoring opportunity), the effect is stronger for firms with stronger incentives for REM and for firms operating in poorer governance environments. Collectively, our findings suggest that SCAs presumably play an important monitoring role in constraining corporate real earnings manipulation.