Abstract - Analyst Monitoring and Financial Development

The effectiveness of financial analysts as monitors of firms increases with financial development (FD). Using a sample of 65,799 firm-year observations in 21 countries from 1994 to 2002, we find that in high-FD countries, increased within-firm analyst coverage results in less earnings management. Such is not the case in low-FD countries. Our results are economically significant and robust to reverse causality checks. Our findings illustrate one mechanism through which financial development mitigates the cost of monitoring firms.

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