Investor sentiment and earnings management: Does analysts' monitoring matter?

Abstract

Purpose: Under the assumption that managers have incentives to practice earnings management in optimistic moments, this paper aims to analyze whether analysts' monitoring affects the relation between the discretionary accumulations (accruals) and investor sentiment in the Brazilian capital market. Originality/value: The mediating role of analysts in the relation between investor sentiment and earnings management was not identified in the literature establishing an important gap to be investigated, given the relevance of the reported earnings for the decision-making process of market participants. Design/methodology/approach: Fixed effects regressions (industry and quarter) were estimated from 2010 to 2016, using all data and the subsetting sample according to whether or not companies were monitored by analysts. Findings: The results showed a reduction of earnings management after optimistic moments, which differs from the initial expectation and such behavior is attributed to the presence of analysts following companies. The results were robust to alternative proxies for earnings management and investor sentiment. Analysts have an influence on accounting earnings supporting the best disclosure, so inhibiting the practice of earnings management in optimistic moments. Therefore, although previous studies suggest that earnings management practices increase during optimistic moments, market participants may consider, even in such moments, a better earnings quality when firms are monitored by analysts.