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Accruals Quality and Analyst Coverage
Minsup Song,
Sogang University
Gerry Lobo, University of Houston
Mary Stanford, Texas Christian University
ABSTRACT. As accrual accounting requires managers to estimate the future economic consequences of current events, accruals reflect estimation errors. Lower quality accruals provide noisier signals of firm value, increasing opportunities for analysts to profit from private analysis. If investors turn to analysts for supplemental information, demand for analyst services increases. We find that analyst coverage increases as accruals quality decreases. Analysts may also issue forecasts after earnings announcements as uncertainty embedded in accruals is resolved as past accruals are realized into cash. We find that forecast revisions increase as accruals quality decreases, indicating that accounting reports are relatively more informative for firms with lower quality accruals. In addition, firms with lower accruals quality have larger forecast errors and dispersion, suggesting analysts are unable to fully resolve uncertainty in accruals. This is consistent with accruals reflecting information risk.
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