Relationship of Earnings Management to Information Asymmetry: is there an Impact of Financial Analyst Coverage? An Empirical Study"

Document Type : Original Article

Authors

1 Accounting Faculty of Commerce Zagazig University

2 Accounting Department Faculty of Commerce Zagazig University

Abstract

In light of the significance of accounting information in the financial markets, there are many of accounting literature has been concerned with the factors determining the degree of similarity among users; although practices of earnings management were mentioned as one of these factors, the variation in their results in this regard may mean this influence –practices of earnings management on the information asymmetry- on other variables that can moderate it, and this is what the current research can suggest “financial analyst coverage” as one of the moderating and determining variables for this effect. This is in light of its recently developed and supervisory roles, on the basis of which the actual practices of profit management in companies can be classified into one of two cases: firstly, informational practices - that is, beneficial to shareholders - while opportunistic practices represent the other case - harmful to shareholders - and then the impact of these practices differs on the information asymmetry, the effect -of course- is likely to be a decrease in the informational case and an increase in the other case. Empirically, the current research used the modified (Jones) model to measure the degree of profit management; and the “volume and price range” variables to measure asymmetry in three different measures. The first: on the day of announcing the financial reports, the second: a three-day window, which represents the difference between a day following the announcement of the reports from a previous day, and the third: the eleven-day window, which represents the difference between the average of five days following the announcement of its counterpart before the announcement; This is for a sample consisting of 60 Egyptian joint stock companies during the period 2012 – 2019. Using interactive regression and appropriate statistical tests, the research found in its various models the validity of the interaction of financial analyst coverage and earnings management in affecting information asymmetry measured by the trading volume on the day of publication only, and by the price range in the three measurements; this means the significance of the moderating effect of analyst coverage on the relationship of earnings management with the asymmetry in the mentioned measurements; the current research also denied the significance of the interaction in the two trading volume windows, which means that it is necessary to refer to the basic effect of the interaction variables in this case, through which it became clear that the earnings management may be significant in influencing the price range on the day of publication and in the three-day window, and the significance of analyst coverage in affecting the trading volume and price range. In all three measurements except for an eleven-day window of price range. This is what the researchers inferred on the effectiveness of the oversight role of analysts in the Egyptian environment, and even the possibility of their contribution to the management’s selection of accounting policies to the extent that they control the goal of practices of earnings management because those practices are characterized by informatics with high coverage, and opportunism with its low, and then the impact of earnings management varies on the asymmetry by the level of analyst coverage, as indicated by the results of the current research.

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