Do Analysts Use Their Cash Flows Forecasts When Setting Target Prices?

42 Pages Posted: 9 Jul 2012 Last revised: 30 Oct 2012

See all articles by Noor Hashim

Noor Hashim

Lancaster University Management School

Norman C. Strong

University of Manchester - Alliance Manchester Business School

Date Written: October 30, 2012

Abstract

This study examines whether analysts’ decisions to issue cash flows forecasts depend endogenously on their decision to use these forecasts to set target prices. An endogenous switching regression model, with analyst report regimes of disclosure and non-disclosure of cash flow forecasts, shows that cash flow revisions are more important than earnings revisions in explaining the magnitude of target price revisions in the cash flow disclosure regime. Cash flow forecasts influence and are influenced by analyst valuation choices. Additional analysis shows that cash flow-based pseudo-target prices play a greater role in explaining target price implied returns than do earnings-based pseudo-target prices. These findings provide insights into analysts’ valuation decision processes.

Keywords: cash flow forecasts, equity analysts, target price revisions, pseudo-target prices, valuation inputs

JEL Classification: M41, G12, G24, G29, C35

Suggested Citation

Hashim, Noor and Strong, Norman Charles, Do Analysts Use Their Cash Flows Forecasts When Setting Target Prices? (October 30, 2012). Available at SSRN: https://ssrn.com/abstract=2102306 or http://dx.doi.org/10.2139/ssrn.2102306

Noor Hashim

Lancaster University Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Norman Charles Strong (Contact Author)

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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