To Beat or Not to Beat? The Importance of Analysts’ Cash Flow Forecasts

47 Pages Posted: 13 Jun 2010 Last revised: 26 Mar 2014

See all articles by Lawrence D. Brown

Lawrence D. Brown

Temple University - Department of Accounting

Kelly Huang

Florida International University

Arianna S. Pinello

Florida Gulf Coast University

Date Written: May 2011

Abstract

We investigate the implications of firms’ benchmark-beating pattern with respect to analysts’ quarterly cash flow forecasts for current capital market valuation and future firm performance. We contend that nonnegative earnings surprises are more likely to be supported by real operating performance and signal higher earnings quality if they are achieved via higher than expected cash flows or lower than expected accruals. We show that firms beating analyst earnings forecasts experience larger positive capital market reactions and larger earnings response coefficients if they beat analyst cash flow forecasts or report lower than expected accruals. We show that superior future firm performance provides an economic justification for the more favorable capital market response obtained by these firms. Our findings suggest that firms’ ability to beat analyst cash flow forecasts is informative regarding the quality of earnings surprises.

Keywords: Analyst cash flow forecasts, Valuation consequences, Future firm performance

JEL Classification: C12, C21, M41

Suggested Citation

Brown, Lawrence D. and Huang, Kelly and Pinello, Arianna S., To Beat or Not to Beat? The Importance of Analysts’ Cash Flow Forecasts (May 2011). Available at SSRN: https://ssrn.com/abstract=1623856 or http://dx.doi.org/10.2139/ssrn.1623856

Lawrence D. Brown

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Kelly Huang

Florida International University ( email )

11200 SW 8th Street
Miami, FL 33199
United States

Arianna S. Pinello (Contact Author)

Florida Gulf Coast University ( email )

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

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