Real Activities Manipulation to Meet Analysts' Cash Flow Forecasts

Abstract

This paper investigates whether firms have incentives to opportunistically manipulate real activities to meet analysts' cash flow forecasts and the economic consequence of such manipulation. Using the measurements of real activities manipulation from Roychowdhury (2006), I find that shows that firms which just meet cash flow forecasts engage in higher real activities manipulation to inflate cash flows, as compared to other firms with cash flow forecasts. These real activities manipulation impair the firms' operating performance in the subsequent year. These results are consistent with the notions that meeting cash flow forecasts provides firms with incentives to manipulate cash flow opportunistically, even if these manipulations impair such firms' future performance (Graham et al. 2005).

Keywords: Real activities manipulation, Abnormal cash flow, Analysts' cash flow forecasts, Future performance

JEL Classification: M41, G14, D84