Firms' Propensity to Meet or Miss Analysts' Forecasts of Cash Flows and Earnings
Posted: 9 Feb 2008 Last revised: 31 Mar 2014
Date Written: October 14, 2008
We investigate firms' propensity to meet analysts' forecasts of cash flows and earnings, and identify factors pertaining to market valuation, financial analysts, and firms' financial condition to explain why firms sometimes meet cash flow forecasts but miss earnings forecasts. Firms meet cash flow forecasts but miss earnings forecasts nearly 75 percent as often as they meet earnings forecasts but miss cash flow forecasts. Firms are more likely to meet cash flow forecasts but miss earnings forecasts when: (1) the adverse valuation consequences of doing so are less severe; (2) analyst following of cash flows vis-a-vis earnings is large; (3) analysts forecast extreme positive accruals; (4) analysts downwardly revise cash flow but not earnings forecasts; (5) firms are in financial distress; (6) firms have inflated balance sheets; and (7) firms report decreases in earnings but not cash flows. We contribute to the literature exploring the importance of analysts' cash flow forecasts.
Keywords: Analyst forecasts, Cash flow forecasts, Earnings forecasts, Meeting or missing forecasts
JEL Classification: C12, C21, M41
Suggested Citation: Suggested Citation