Governance Role of Analyst Coverage and Investor Protection

This study examines whether investor protection affects the governance role of analysts in constraining earnings management. Using a sample of 50,966 company-year observations from 24 countries for 1990-2007, the study finds that earnings management is more negatively associated with analyst coverage in weak investor protection countries than in strong investor protection countries. The findings suggest that analyst coverage plays a more important governance role in countries where investor protection is weak (i.e., a substitute relationship exists between analyst coverage and investor protection).