Firms’ Propensity to Report Cash Flow and Earnings Surprises of Divergent Signs
Lawrence D. Brown
Arianna S. Pinello
Florida Gulf Coast University
Nonnegative (negative) cash flow surprises help generate nonnegative (negative) earnings surprises; hence, the two surprises are generally expected to have the same sign. We document firms’ propensity to report surprises of opposing signs and investigate conditions under which firms beat cash flow forecasts but miss earnings forecasts. Firms are more likely to do so when: adverse valuation consequences are less severe; analyst following of cash flows vis-à-vis earnings is large; analysts forecast extreme accruals; analysts downwardly revise cash flow but not earnings forecasts; firms are in financial distress; firms have inflated balance sheets; and earnings but not cash flows decrease.
Number of Pages in PDF File: 40
Keywords: Analyst cash flow forecasts, analyst earnings forecasts, earnings surprises, cash flow surprises, beating or missing forecasts
JEL Classification: C12, C21, M41, M43, G29, G33working papers series
Date posted: September 11, 2008 ; Last revised: July 25, 2011
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