To beat or not to beat? The importance of analysts’ cash flow forecasts

Lawrence Brown, Kelly Huang and Arianna Pinello ()

Review of Quantitative Finance and Accounting, 2013, vol. 41, issue 4, 723-752

Abstract: We investigate the implications of firms’ benchmark-beating patterns with respect to analysts’ quarterly cash flow forecasts for firms’ current capital market valuation and their future performance. We hypothesize that nonnegative earnings surprises are more likely to be supported by real operating performance and signal higher earnings quality if they are achieved via higher than expected cash flows or lower than expected accruals. We show that firms beating analyst earnings forecasts have larger positive capital market reactions and larger earnings response coefficients if they beat analyst cash flow forecasts or report lower than expected accruals. We also demonstrate that these firms’ superior future performance may provide an economic justification for their more favorable market response. Our findings suggest that firms’ ability to beat analyst cash flow forecasts is informative regarding the quality of their earnings surprises. Copyright Springer Science+Business Media New York 2013

Keywords: Analyst forecasts; Cash flows; Valuation consequences; Firm performance; C12; C21; M41 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (9)

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DOI: 10.1007/s11156-012-0330-z

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