Do Analysts Strategically Provide Cash Flow Forecasts? A Multi-Theory Multi-Methods Study

Abstract

Our study delves into analysts’ motivation to issue concurrent cash flow forecasts in addition to earnings forecasts to achieve the analysts’ specific strategic objectives. To investigate this motivation, we use economics based signaling theory and psychology based support theory to develop our hypotheses and then employ multiple methods to investigate them. First, we perform archival tests using analyst forecasts found in the I/B/E/S database. Second, we analyze a hand collected sample of 412 sell-side analyst reports. Third, to complement the preceding research, we conduct field research on sell-side analysts’ forecasting activities. Our results indicate that sell-side analysts strategically choose to issue positive cash flow forecast revisions in an effort to diminish the negative impact on themselves of releasing bad (i.e. negative or downward) news in their earnings forecast revisions. Our results suggest that analyst decisions to issue cash flow forecasts are akin to managers’ strategic decisions to voluntarily disclose supplemental information to affect investors’ confidence in their primary news and may not be motivated by being an objective third party review of the future prospects of the companies they cover that institutional rhetoric suggests they are valued by capital markets for.

Keywords: analysts, cash flow forecast, earnings forecast, forecast revisions

JEL Classification: M40, M41, D82, D83, G24