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

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.

OPERATING CASH FLOW ON EARNINGS MANAGEMENT: EVIDENCE FROM NIGERIAN BANKS

This study assesses the effect of operating cash flow on earnings management of Nigerian Banks. The study adopted Ex post Facto research design. The study used sample of fifteen (15) Nigerian banks from 2010 to 2019. Data for the study was collected from annual reports and accounts of the banks. Regression analysis was used to test the hypothesis with the aid of E-view 9.0. Based on this, the study revealed that operating activities are not statistically significant and have a negative effect on total accruals earnings of Nigerian banks. The study concludes that the importance of risk management activities is aimed at reducing future cash flow. Based on this, the researcher recommended among others that managers should be more likely to opportunistically boost operating cash flows if the firm has a cash flow forecast like engaging in principal financing source for maintaining the operating capability of the entity in terms of repaying loan and making new investment.

Literature Review of Treasury Cash Flow Forecast

In this paper, the related literatures of treasury cash flow forecasting in the early stage are reviewed. By reviewing the related literatures, it is found that the treasury cash flow forecasting in China has made great progress, and various forecasting methods have been used in practical work, but there is still room for optimization in treasury cash flow forecasting. Suggestions for optimization are put forward.

CASH FLOW FORECASTING FOR INTERNATIONAL PROJECTS IN THE PROCESS OF CAPITAL BUDGETING DURING THE COVID-19

By predicting cash flows in the capital budgeting procedure, the profitability of an investment at the international level is determined in advance. Although investing globally provides greater opportunities for earnings, cost reduction and business diversification, all risks posed by international business must be considered when choosing a discount rate. In addition to the risks inherent in cross-border business such as exchange rate risk, country risk, the risks caused by the pandemic crisis, which relate primarily to measures taken by states to protect the population by introducing quarantine, restricting the flow of people, goods and capital, as well as activities that are endangered by a pandemic, must be considered too. If all the risks that determine the discount rate are well assessed, the cash flow forecast will be more accurate.

Engro Fertilizers Limited: Cost of Capital and Valuation

The case is based on Engro Fertilizers Limited (EFERT), a company listed on the Pakistan Stock Exchange and an important player in the fertilizer sector of Pakistan. The case describes the role of a senior equity analyst at Intermarket Securities Limited (IMS), Qasim Ahmad, who is preparing the Intermarket Pulse report on Pakistan’s fertilizer sector. The upcoming report, due on 16 February 2017, requires a comprehensive analysis. Qasim gathered the background information on the fertilizer sector in Pakistan as well as EFERT and asked a newly hired junior analyst to prepare an estimate of EFERT’s cost of capital. Now Qasim has to review the workings of the new hire and then prepare the cash flow forecast to determine the stock’s target price.

A Study on the Relationship between Analysts’ Cash Flow Forecasts Issuance and Accounting Information: Evidence from Korea

This study analyzes the relationship between the future cash flow forecast information provided by financial analysts and accounting information. We examine whether the joint issuance of financial analyst earnings forecasts and cash flow forecasts from 2011 to 2015 contributes to the information usefulness of Korean listed firms. The empirical results of this study are as follows. First, the issuance of analysts’ cash flow forecasts and earnings forecast accuracy were significant positive values. Cash flow forecast accuracy and earnings forecast accuracy were significant positive values. Second, the issuance of analysts’ cash flow forecasts and buy–sell bid spread are significant negative values. These results show that the information asymmetry between the manager and the investor can be reduced based on the rich information environment. This study suggests that cash flow forecasting information of financial analysts provides important evidence for capital market participants because it provides evidence that capital market participants’ information can be used as useful information for economic decision-making. These results show the sustainability of a firm from the viewpoint of a financial analyst who acts as an intermediary and external supervisor in the capital market. In addition, the analysts’ cash flow forecasting information is expected to reduce the information asymmetry between the company and the investor, thereby increasing the transparency and sustainability of the firm.

Terminal Value Calculation in DCF Valuation Models: An Empirical Verification

The paper presents an empirical verification of the main assumptions underlying the calculation of terminal value in DCF valuation models. The test results suggest that the volatility of free cash flows and the dynamism of the operating environment do not allow us to make a reliable long-term forecast of value creation potential of the public companies in Poland. Regardless of their organic growth phase, the overwhelming majority of the sampled firms are evidenced to exhibit extreme year-on-year fluctuations of sales, investments and cash flows over the short- and medium-term observation windows. The variability of operating results and the probabilistic nature of company-level fundamentals may preclude the possibility of constructing a reliable cash flow forecast for the purposes of a DCF valuation. This methodological issue appears to pose a particular challenge during the calculation of terminal value, which is heavily dependent on highly subjective and uncertain steady-state fundamentals. Therefore, the predictive power of the deterministic DCF models may be reduced to a snapshot of the current market sentiment regarding a particular stock. The paper postulates that a further discussion on the tenets of terminal value calculation may be necessary in order to overcome the existing flaws and increase the accuracy of valuation models. We contribute to this discussion by outlining the principal methodological and theoretical issues which challenge the practicing valuators at the stage of terminal value calculation. Our conclusions may help to shed light on the problems of market short-termism, and high inconstancy of investment recommendations.

Carded Graphics, LLC: Sheeter Replacement Decision

A growing folding carton company is contemplating the replacement of an old machine with a new one. The case challenge is to develop a cash flow forecast and determine the proper discount rate for the machine replacement. In addition to increased capacity and reduced waste, the new machine offers strategic advantages to the firm in its chosen market niche. Issues related to operations are central to appreciating the importance and implications of this capital investment: Operating excellence is a key competitive advantage for this firm. A teaching note and student and instructor Excel spreadsheets are available to accompany the case for instructors.