Earnings quality and analysts’ information environment: Evidence from the EU market

This study examines the relationship between earnings quality and analysts’ information environment as measured by analyst following, analysts' forecasts dispersion, and analysts' forecasts accuracy. It uses a sample of all the non-financial listed firms in the 15-member states of the European Union between 2000 and 2015. We find evidence that firms with high earnings quality have a higher analyst following, less dispersion of analysts' forecasts, and more accurate forecasts from analysts. We also provide evidence of a positive link between the strength of this relationship and both the International Financial Reporting Standards and the strength of enforcement regimes in European Union countries. Further, we find that the innate component of earnings quality dominates the effect on analysts’ information environment proxies, whereas the discretionary component is likely to have a negligible impact. These findings shed light on the vital role of earnings quality in helping analysts and investors to make better financial investment decisions.