An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Lixin (Nancy) Su
The Hong Kong Polytechnic University

Yinqi Zhang
American University

Abstract: This study examines relations between the provision of non-audit services (NAS) and analysts’ information precision and between NAS and analyst coverage. Our empirical measures distinguish between the precision of common (public) and idiosyncratic (private) information reflected in analysts’ forecasts. We find that NAS is negatively associated with the precision of analysts’ common information, but is not related to the precision of analysts’ idiosyncratic information. This evidence is consistent with the allegation that NAS impairs auditor independence and adds noise to public information available to analysts. Further, we find firms with more NAS have lower analyst coverage, which suggests that NAS may have increased the costs for analysts to follow the firms and therefore caused some analysts not to follow firms with substantial NAS. To the extent that analyst information precision and coverage likely represent a good proxy for firms’ information environment, these findings imply that NAS has an adverse impact on firm’s information environment.

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