Firms’ Propensity to Report Cash Flow and Earnings Surprises of Divergent Signs

40 Pages Posted: 11 Sep 2008 Last revised: 26 Mar 2014

See all articles by Lawrence D. Brown

Lawrence D. Brown

Temple University - Department of Accounting

Arianna S. Pinello

Florida Gulf Coast University

Date Written: June 2011

Abstract

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.

Keywords: Analyst cash flow forecasts, analyst earnings forecasts, earnings surprises, cash flow surprises, beating or missing forecasts

JEL Classification: C12, C21, M41, M43, G29, G33

Suggested Citation

Brown, Lawrence D. and Pinello, Arianna S., Firms’ Propensity to Report Cash Flow and Earnings Surprises of Divergent Signs (June 2011). Available at SSRN: https://ssrn.com/abstract=1266812 or http://dx.doi.org/10.2139/ssrn.1266812

Lawrence D. Brown

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Arianna S. Pinello (Contact Author)

Florida Gulf Coast University ( email )

10485 FGCU Blvd S
Ft. Myers, FL 33965-6565
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
206
Abstract Views
1,145
rank
148,946
PlumX Metrics