Analyst Following, Capital Market Pressure, and Real Activity Manipulation

I investigate the impact of analyst following on real activity manipulation. Because analysts follow firms and serve as information intermediaries, analyst following should reduce earnings management through real activity manipulation. However, given the negative ramifications of missing analysts' earnings forecasts, the fact that analysts are watching and issuing forecasts might actually create capital market pressures as managers try to ensure that they do not miss earnings targets. Because managers can engage in earnings management through real activities manipulation and accrual manipulation, I control for accrual manipulation in examining the relationship between analyst following and real activity manipulation. I find that analyst following is associated with more real activities earnings management. I also find evidence that discretionary accrual manipulation and real activity manipulation are used as substitutes to manage earnings. These findings provide valuable information for model specification for future research that investigates earnings management.