Soft-Talk Management Cash Flow Forecasts: Bias, Quality, and Stock Price Effects
61 Pages Posted: 3 Jan 2012
Date Written: November 3, 2011
Abstract
We exploit a novel feature of management cash flow forecasts (MCFFs) to investigate how managers’ discretion over forecast precision, clarity, and verifiability affects the bias, quality, and stock price effects of such forecasts. Many MCFFs are issued with an equivocal definition of the cash flow number being forecasted. We refer to such forecasts as “Soft-Talk” MCFFs and predict, due to their lower precision and clarity, potential for bias, and low ex-post verifiability, that they will have lower disclosure quality and lower credibility with investors when compared to “GAAP-Based” MCFFs. “GAAP-Based” MCFFs are those whose cash flow definition is associated with a GAAP cash flow measure (e.g., OCF or NCF), one that can be derived from GAAP cash flow measures (e.g., free cash flow, FCF), or one where management explicitly discloses the definition of cash flow. We find that “Soft-Talk” MCFFs are optimistically biased and that managers’ decision to issue “Soft-Talk” MCFFs is related to economic factors including litigation risk, actual cash flow performance, industry concentration, and the issuance of prior cash flow forecasts. As predicted, “Soft-Talk” MCFFs have lower disclosure quality than “GAAP-Based” MCFFs. Finally, while MCFFs in general affect stock prices, consistent with the low precision and clarity, and potential for optimistic bias in “Soft-Talk” MCFFs, they have no effect on stock prices. Our findings document how and why managers’ discretion over forecast precision, clarity, and verifiability affects the bias, quality, and stock price effects of such forecasts.
Keywords: management forecasts, cash flow forecasts, disclosure
JEL Classification: M41, G14
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Role of Supplementary Statements with Management Earnings Forecasts
By Amy P. Hutton, Gregory S. Miller, ...
-
Do Managers Withhold Bad News?
By S.p. Kothari, Susan Shu, ...
-
By Marilyn F. Johnson, Ron Kasznik, ...
-
Does Disclosure Deter or Trigger Litigation?
By Laura Casares Field, Michelle Lowry, ...
-
Shareholder Wealth Effects of the Private Securities Litigation Reform Act of 1995
By Marilyn F. Johnson, Ron Kasznik, ...
-
Do Conference Calls Affect Analysts' Forecasts?
By Robert M. Bowen, Angela K. Davis, ...
-
The Financial Reporting Environment: Review of the Recent Literature
By Anne Beyer, Daniel A. Cohen, ...
-
Management Earnings Forecasts: A Review and Framework
By D. Eric Hirst, Lisa Koonce, ...