Are Analysts' Cash Flow Forecasts Naïve Extensions of Their Own Earnings Forecasts?

Andrew C. Call, Shuping Chen and Yen H. Tong

Contemporary Accounting Research, 2013, vol. 30, issue 2, 438-465

Abstract: We examine the sophistication of analysts' cash flow forecasts to better understand what accrual adjustments, if any, analysts make when forecasting cash flows. As a preliminary step, we first demonstrate that prior empirical tests used to evaluate the sophistication of analysts' cash flow forecasts are not diagnostic. We then present three sets of evidence to triangulate our conclusion that analysts' cash flow forecasts incorporate meaningful accrual adjustments. First, we review a stratified random sample of 90 analyst reports and find that the majority of these analysts include explicit adjustments for working capital and other accruals in their cash flow forecasts. Second, using a large sample of analysts' cash flow forecasts from 1993–2008, we find that these forecasts outperform time†series cash flow forecasts in correctly predicting the sign and magnitude of accruals. Finally, we find a significant market reaction to analysts' cash flow forecast revisions, suggesting that investors find these revisions informative. Collectively, our findings demonstrate that analysts' cash flow forecasts are not simply naïve extensions of their own earnings forecasts, but that they reflect meaningful and useful accrual adjustments. These findings are relevant to researchers who examine analysts' cash flow forecasts in a variety of settings, and to investors and practitioners who employ these forecasts for valuation purposes.

Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (22)

Downloads: (external link)
https://doi.org/10.1111/j.1911-3846.2012.01184.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:coacre:v:30:y:2013:i:2:p:438-465

Access Statistics for this article

More articles in Contemporary Accounting Research from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().