Are analysts' cash flow forecasts naïve extensions of their own earnings forecasts?

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...

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Main Authors: Call, Andrew C., Chen, Shuping, Tong, Yen Hee
Other Authors: Nanyang Business School
Format: Article
Language:English
Published: 2013
Online Access:https://hdl.handle.net/10356/99791
http://hdl.handle.net/10220/17595
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Institution: Nanyang Technological University
Language: English
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spelling sg-ntu-dr.10356-997912023-05-19T06:44:40Z Are analysts' cash flow forecasts naïve extensions of their own earnings forecasts? Call, Andrew C. Chen, Shuping Tong, Yen Hee Nanyang Business School 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. 2013-11-12T05:26:39Z 2019-12-06T20:11:32Z 2013-11-12T05:26:39Z 2019-12-06T20:11:32Z 2012 2012 Journal Article Call, A. C., Chen, S., & Tong, Y. H. (2013). Are Analysts' Cash Flow Forecasts Naïve Extensions of Their Own Earnings Forecasts?. Contemporary Accounting Research, 30(2), 438-465. https://hdl.handle.net/10356/99791 http://hdl.handle.net/10220/17595 10.1111/j.1911-3846.2012.01184.x en Contemporary accounting research © 2012 The Canadian Academic Accounting Association
institution Nanyang Technological University
building NTU Library
continent Asia
country Singapore
Singapore
content_provider NTU Library
collection DR-NTU
language English
description 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.
author2 Nanyang Business School
author_facet Nanyang Business School
Call, Andrew C.
Chen, Shuping
Tong, Yen Hee
format Article
author Call, Andrew C.
Chen, Shuping
Tong, Yen Hee
spellingShingle Call, Andrew C.
Chen, Shuping
Tong, Yen Hee
Are analysts' cash flow forecasts naïve extensions of their own earnings forecasts?
author_sort Call, Andrew C.
title Are analysts' cash flow forecasts naïve extensions of their own earnings forecasts?
title_short Are analysts' cash flow forecasts naïve extensions of their own earnings forecasts?
title_full Are analysts' cash flow forecasts naïve extensions of their own earnings forecasts?
title_fullStr Are analysts' cash flow forecasts naïve extensions of their own earnings forecasts?
title_full_unstemmed Are analysts' cash flow forecasts naïve extensions of their own earnings forecasts?
title_sort are analysts' cash flow forecasts naïve extensions of their own earnings forecasts?
publishDate 2013
url https://hdl.handle.net/10356/99791
http://hdl.handle.net/10220/17595
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