Abstract

http://ssrn.com/abstract=2071559
 
 

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Are Analysts’ Cash Flow Forecasts Naive Extensions of Their Own Earnings Forecasts?


Andrew C. Call


Arizona State University (ASU) - School of Accountancy

Shuping Chen


University of Texas at Austin - Red McCombs School of Business

Yen H. Tong


Nanyang Technological University (NTU) - Nanyang Business School

March 1, 2012


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.

Number of Pages in PDF File: 47

Keywords: analysts, cash flow forecasts, accrual adjustments, forecast revisions

JEL Classification: M40, M41, M49

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Date posted: June 1, 2012  

Suggested Citation

Call, Andrew C. and Chen, Shuping and Tong, Yen H., Are Analysts’ Cash Flow Forecasts Naive Extensions of Their Own Earnings Forecasts? (March 1, 2012). Available at SSRN: http://ssrn.com/abstract=2071559 or http://dx.doi.org/10.2139/ssrn.2071559

Contact Information

Andrew C. Call (Contact Author)
Arizona State University (ASU) - School of Accountancy ( email )
Tempe, AZ 85287
United States
Shuping Chen
University of Texas at Austin - Red McCombs School of Business ( email )
Austin, TX 78712
United States
521.471.5328 (Phone)
Yen H. Tong
Nanyang Technological University (NTU) - Nanyang Business School ( email )
Singapore 639798
Singapore
65-6790-5743 (Phone)
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