Analysts' Cash Flow Forecasts and the Predictive Ability and Pricing of Operating Cash Flows
52 Pages Posted: 19 Mar 2009
Date Written: December 15, 2008
I examine the association between analysts' cash flow forecasts and the predictive ability and pricing of operating cash flows. I argue that when analysts issue cash flow forecasts, they serve a monitoring role over the firm's reported cash flow information. Consistent with this idea, I find the ability of current cash flows to predict future cash flows is greater for firms whose analysts issue cash flow forecasts, and improves when analysts begin forecasting cash flows, suggesting analysts' cash flow forecasts discipline managers to report cash flow information that is more informative about future firm prospects. Furthermore, I find the incremental weight investors assign to operating cash flows is greater for firms with a cash flow forecast than for firms without a cash flow forecast, and increases in the years immediately after analysts begin issuing cash flow forecasts. As a result, the anomalous underpricing of operating cash flows is eliminated for firms whose analysts issue cash flow forecasts. These results suggest analysts' cash flow forecasts have implications for both the reporting and pricing of cash flow information.
Keywords: security analysts, cash flow forecasts, cash flow prediction, cash flow pricing
JEL Classification: G12, G14, M41, G29
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