Analysts’ Cash Flow Forecasts and the Decline of the Accruals Anomaly

57 Pages Posted: 30 Jan 2014

See all articles by Partha S. Mohanram

Partha S. Mohanram

University of Toronto - Rotman School of Management

Date Written: June 1, 2013

Abstract

The accruals anomaly, demonstrated by Sloan (1996), generated significant excess returns consistently for over four decades until 2002, but has apparently weakened in the subsequent period. In this paper, I argue that one factor responsible for this decline is the increasing incidence of analysts’ cash flow forecasts that provides markets with forecasts of future accruals. The negative relationship between accruals and future returns is significantly weaker in the presence of cash flow forecasts. This anomalous relationship becomes weaker with the initiation cash flow forecasts but continues after cash flow forecasts are terminated. Further, the mitigating effect of cash flow forecasts is greater for forecasts that are more accurate. The results are incremental to explanations based on the improved accrual quality, reduced manipulation of special items and restructuring charges and greater investment in accruals strategies by hedge funds and highlight the increasing importance of analysts’ cash flow forecasts in the appropriate valuation of stocks.

Keywords: Accrual Anomaly, Cash flow forecasts, Market mispricing, Equity valuation

JEL Classification: M40, G14

Suggested Citation

Mohanram, Partha S., Analysts’ Cash Flow Forecasts and the Decline of the Accruals Anomaly (June 1, 2013). Available at SSRN: https://ssrn.com/abstract=2386210 or http://dx.doi.org/10.2139/ssrn.2386210

Partha S. Mohanram (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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