Are Analysts’ Cash Flow Forecasts Naive Extensions of Their Own Earnings Forecasts?

2012 ◽  
Author(s):  
Andrew C. Call ◽  
Shuping Chen ◽  
Yen H. Tong
Keyword(s):  
Cash Flow ◽  
Earnings Forecasts ◽  
Cash Flow Forecasts

Do Analysts' Cash Flow Forecasts Mitigate the Accrual Anomaly? International Evidence

2014 ◽  
Vol 13 (1) ◽  
pp. 61-90 ◽  
Author(s):  
Elizabeth A. Gordon ◽  
Karin A. Petruska ◽  
Minna Yu
Keyword(s):  
Cash Flow ◽  
Common Law ◽  
Sample Selection ◽  
Earnings Forecasts ◽  
World Market ◽  
Data Availability ◽  
Accrual Anomaly ◽  
International Setting ◽  
Public Disclosures ◽  
Cash Flow Forecasts

ABSTRACT We investigate the role of analysts' cash flow forecasts in mitigating the accrual anomaly in an international setting. Based on a sample from 20 world market economies, we find less market overestimation of the accrual component of earnings for firms where analysts issue both cash flow forecasts and earnings forecasts, compared with firms where analysts only issue earnings forecasts. Further tests show that analysts' provisions of cash flow forecasts are more likely to be a mechanism that attenuates investors' fixations on earnings in common law countries as opposed to code law countries. This finding is consistent with cash flow predictions by analysts being useful in countries where public disclosures are the primary communication channels in the capital markets. We also find the accrual anomaly to be less severe when analysts provide more accurate cash flow forecasts in common law countries. Our results are robust to additional sensitivity tests, including controlling for potential sample selection bias and an endogeneity bias. JEL Classifications: G14, G15, M41. Data Availability: Data used are available from sources identified in the paper.

Analysts’ cash flow forecasts informativeness, financial distress and auditor quality

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Afroditi Papadaki ◽  
Olga-Chara Pavlopoulou-Lelaki
Keyword(s):  
Cash Flow ◽  
Financial Distress ◽  
Value Relevance ◽  
Earnings Forecasts ◽  
Forecast Horizon ◽  
Content Type ◽  
Auditor Quality ◽  
Distressed Firms ◽  
Cash Flow Forecasts ◽  
Cash Flow Forecast

Purpose The purpose of this study is to examine the sophistication (accuracy, bias, informativeness for changes in accruals) and market pricing of analysts’ cash flow forecasts for Eurozone listed firms and the effects of financial distress and auditor quality. Design/methodology/approach Accuracy/bias is investigated using analysts’ cash flow forecast errors. The naïve extrapolation model is used to examine the forecasts’ informativeness for working capital changes. A total return model is used to examine value-relevance. This study controls for the forecast horizon, using the Altman z-score and a BigN/industry specialization auditor indicator to proxy for distress and auditor quality, respectively. Findings Analysts efficiently adjust earnings forecasts for depreciation during cash flow forecast formation but fail to efficiently incorporate working capital changes. Findings indicate cash flow forecasts’ accuracy improves for distressed firms and firms of high auditor quality, attributed to analyst conservatism and accounting choices and more accurate earnings forecasts, respectively. Cash flow forecasts’ value-relevance increases for distressed firms, particularly those of high auditor quality and timely forecasts. Originality/value To the best of the authors’ knowledge, this study is the first to examine analysts’ cash flow forecasts taking into consideration financial distress and auditor quality, controlling for the analyst forecast horizon.

The association of analysts’ cash flow forecasts with stock recommendation profitability

2020 ◽  
Vol 28 (2) ◽  
pp. 343-361 ◽  
Author(s):  
Shanshan Pan ◽  
Zhaohui Randall Xu
Keyword(s):  
Cash Flow ◽  
Earnings Quality ◽  
Earnings Forecasts ◽  
Firm Valuation ◽  
Market Demand ◽  
Content Type ◽  
Stock Recommendations ◽  
Stock Recommendation ◽  
Cash Flow Forecasts

Purpose The purpose of this paper is to examine whether analysts’ cash flow forecasts improve the profitability of their stock recommendations and whether the positive effect of cash flow forecasts on analysts’ stock recommendation performance varies with firms’ earnings quality. Design/methodology/approach To test the authors’ predictions, they identify a sample of 161,673 stock recommendations with contemporaneous earnings forecasts and/or cash flow forecasts and regress market-adjusted stock returns on a binary variable that proxies for the issuance of cash flow forecasts while controlling for contemporaneous earnings forecast accuracy, earnings quality, analysts’ forecast experience and capability and certain firm characteristics. The authors’ test results are robust to alternative measures of recommendation profitability, earnings quality and the use of recommendation revisions instead of recommendation levels. Findings The authors find that when analysts issue cash flow forecasts concurrently with earnings forecasts, their stock recommendations lead to higher profitability than when they only issue earnings forecasts, after controlling for analysts’ forecast capability. Moreover, the authors document that the contemporaneous positive relationship between cash flow forecasts and recommendations profitability is stronger for firms with low earnings quality than for firms with high earnings quality. The findings suggest that cash flow forecasts issued by analysts in response to market demand likely play a more important role in firm valuation than cash flow forecasts issued by analysts mainly because of supply-side considerations. Research limitations/implications Future research could build on these findings to conduct further investigation on the alternative incentives for analysts’ forecasts of sales growth and long-term growth rates. Practical implications These findings may also help investors to better assess the quality of analysts’ research outputs and to identify superior stock recommendations. Originality/value This study provides insight into the role of cash flow forecasts in firm valuation and adds fresh evidence to the debate on the usefulness of cash flow forecasts. It extends the stream of research on the characteristics of analyst forecasts and increases our knowledge about the role of analysts in the financial market.

Properties of analysts’ consensus cash flow forecasts for Australian firms

2020 ◽  
Vol 33 (1) ◽  
pp. 128-147
Author(s):  
Kamran Ahmed ◽  
Muhammad Nurul Houqe ◽  
John Hillier ◽  
Steven Crockett
Keyword(s):  
Cash Flow ◽  
Market Reaction ◽  
Forecast Error ◽  
Earnings Forecasts ◽  
Predictive Performance ◽  
Cash Flows ◽  
Content Type ◽  
Equity Pricing ◽  
Functional Efficiency ◽  
Cash Flow Forecasts

Purpose The purpose of this paper is to determine the properties of analysts’ cash flows from operations (CFO) forecast generated for Australian listed firms as a productive activity, within the wider processes of financial disclosure in Australia. Design/methodology/approach Two categories of criteria are adopted: first, basic predictive statistical performance relative to a benchmark model and earnings forecasts; and second, relevance for equity pricing, as indicated by the market reaction to cash flow or forecast error reactions. The final sample comprised 2,138 observations between 2001 and 2016 and several regression models are estimated to determine the relative performance and market reaction. Findings Analysts’ consensus cash flow forecasts demonstrate poor predictive performance relative to earnings forecasts. Cash flow forecasts are typically naïve extensions of earnings forecasts. Furthermore, cash flow forecasts appear to be of minimal use for equity market participants in complementing earnings forecasts’ role in informing firms’ equity pricing. Practical implications While analysts’ earnings forecasts are useful for making predictions, the role of analysts’ cash flow forecasts in capital market functional efficiency appears quite limited. Originality/value This study is one of few that examines comparative usefulness of analysts’ earnings and cash flow forecasts and their predictive power using the Australian setting. Additionally, it enriches the sparse international literature on such forecasts.

Are analysts’ earnings forecasts more accurate when accompanied by cash flow forecasts?

2009 ◽  
Vol 14 (2-3) ◽  
pp. 358-391 ◽  
Author(s):  
Andrew C. Call ◽  
Shuping Chen ◽  
Yen H. Tong
Keyword(s):  
Cash Flow ◽  
Earnings Forecasts ◽  
Cash Flow Forecasts

scholarly journals The Importance Of Earnings Forecasts, Sales Forecasts, And Cash Flow Forecasts To Stock Price Forecasts

2011 ◽  
Vol 2 (1) ◽  
Author(s):  
Mehdi Sheikholeslami
Keyword(s):  
Cash Flow ◽  
Stock Price ◽  
Earnings Forecasts ◽  
Company Stock ◽  
Sales Forecasts ◽  
Old Economy ◽  
Cash Flow Forecasts ◽  
Stock Values ◽  
Internet Company ◽  
Internet Companies

The spectacular rise and fall of internet company stock values has called into question the rationality of the traditional earnings-based valuation models for internet companies. Unlike many old-economy companies with stable revenue and earnings streams, internet companies often exhibit little current revenues and substantial negative earnings, yet they command very high prices. One plausible explanation for this phenomenon is that the value of internet companies is driven by the expected future growth opportunities. Accordingly, this paper examines the relative importance of sales forecasts, cash flow forecasts, and earnings forecasts to stock price forecasts of internet companies. As predicted, only cash flow forecasts and sales forecasts are significantly associated with stock price forecasts. That is earnings forecasts are not relevant to stock price predictions of internet companies.

The Quality of Analysts' Cash Flow Forecasts

2009 ◽  
Vol 84 (6) ◽  
pp. 1877-1911 ◽  
Author(s):  
Dan Givoly ◽  
Carla Hayn ◽  
Reuven Lehavy
Keyword(s):  
Earnings Management ◽  
Stock Returns ◽  
Cash Flow ◽  
Earnings Forecasts ◽  
Cash Flows ◽  
Limited Information ◽  
Forecast Period ◽  
The Difference ◽  
Cash Flow Forecasts

ABSTRACT: This study examines properties of analysts' cash flow forecasts and compares them to those exhibited by analysts' earnings forecasts. Our results indicate that analysts' cash flow forecasts are less accurate than analysts' earnings forecasts and improve at a slower rate during the forecast period. Further, cash flow forecasts appear to be a nai¨ve extension of analysts' earnings forecasts, thus providing limited information on expected changes in working capital. We also find that analysts' forecasts of cash flows are of limited information content and are only weakly associated with stock returns. Finally, estimating expected accruals as the difference between analysts' earnings forecasts and their cash flow forecasts does not result in a better detection of earnings management than achieved by commonly used accrual models.

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