Earnings Management and Analyst Following: A Simultaneous Equations Analysis

We use a simultaneous equations system to examine the relationship between earnings management and analyst following. We find that analysts’ decisions to follow firms and managerial decisions to manage earnings are jointly determined. Firms with lower levels of accrual‐based earnings management offer a better information environment to attract analyst following. Analyst following, in turn, has important monitoring effects on managerial behavior and results in lower levels of both accrual‐based and real earnings management. The information intermediary effect on analyst following is much weaker for expected “suspect firms” that manage their earnings continuously.