Sell-Side Analysts’ Monitoring and Firms’ Investment Spillovers from Accounting Restatements

This study investigates the monitoring role of sell-side analysts in shaping the investment decisions of peer firms following accounting restatements. We argue that analysts covering the peers of restating firms learn information about peers’ investment projects from restatement announcements. By exerting monitoring pressure, these analysts compel peer firms to correct their previously distorted investment decisions. Using a sample of U.S. accounting restatements, we document that peers of these restating firms significantly reduce their investments following restatement announcements. Furthermore, we find that analysts revise their earnings forecasts downward for the peers after restatement announcements, and these revisions serve as critical informational signals for investors. Consistent with the view that analysts’ independent evaluations constrain managerial overinvestment, we show that reductions in peer firms’ investments are primarily driven by the monitoring intensity of analysts who issue downward forecast revisions. Overall, our results highlight the important role of financial analysts as external monitors who facilitate information transmission and discipline peer firms’ investment decisions in the wake of accounting restatements.