Do Analysts’ Cash Flow Forecasts Encourage Managers to Enhance Real Cash Flows? Evidence from Tax Planning
48 Pages Posted: 13 Feb 2013
Date Written: January 11, 2013
Recent research finds that analysts’ cash flow forecasts have meaningful financial reporting ramifications, but to date, the identified effects are unlikely to yield meaningful cash flow benefits. This study examines whether analysts' cash flow forecasts increase managerial focus on real cash flows and encourage managers to enhance cash flows through tax avoidance. Using a difference-in-differences design, we evaluate the change in cash tax avoidance after analysts begin issuing cash flow forecasts relative to that of a propensity-score matched control sample of firms without cash flow forecasts. Consistent with analysts’ cash flow forecasts encouraging tax avoidance that enhances real cash flows, we find a negative association between cash effective tax rates and both the presence and the intensity of analysts’ cash flow coverage, even after controlling for other known determinants of tax avoidance. Additional analysis suggests that the reduction in cash effective tax rates is primarily driven by strategies to defer (rather than permanently avoid) tax payments, and that increased cash tax avoidance activity represents a significant component of the overall increase in reported cash flows after the initiation of analysts’ cash flow coverage.
Keywords: cash flow forecasts, tax planning
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