Do Analysts' Cash Flow Forecasts Mitigate the Accrual Anomaly? International Evidence

Posted: 20 May 2014

See all articles by Elizabeth A. Gordon

Elizabeth A. Gordon

Temple University - Department of Accounting

Karin A. Petruska

Youngstown State University

Minna Yu

Ball State University

Date Written: May 19, 2014

Abstract

We investigate the role of analysts' cash flow forecasts in mitigating the accrual anomaly in an international setting. Based on a sample from 20 world market economies, we find less market overestimation of the accrual component of earnings for firms where analysts issue both cash flow forecasts and earnings forecasts, compared with firms where analysts only issue earnings forecasts. Further tests show that analysts' provisions of cash flow forecasts are more likely to be a mechanism that attenuates investors' fixations on earnings in common law countries as opposed to code law countries. This finding is consistent with cash flow predictions by analysts being useful in countries where public disclosures are the primary communication channels in the capital markets. We also find the accrual anomaly to be less severe when analysts provide more accurate cash flow forecasts in common law countries. Our results are robust to additional sensitivity tests, including controlling for potential sample selection bias and an endogeneity bias.

Keywords: accrual anomaly; mispricing; analysts' cash flow forecasts

JEL Classification: G14, G15, M41

Suggested Citation

Gordon, Elizabeth A. and Petruska, Karin A. and Yu, Minna, Do Analysts' Cash Flow Forecasts Mitigate the Accrual Anomaly? International Evidence (May 19, 2014). Journal of International Accounting Research, Vol. 13, No. 1, 2014, Available at SSRN: https://ssrn.com/abstract=2438934

Elizabeth A. Gordon

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
2152046422 (Phone)

Karin A. Petruska (Contact Author)

Youngstown State University ( email )

Lariccia School of Accounting & Finance
Williamson College of Business Administration
Youngstown, OH 44555
United States
330-941-1876 (Phone)
330-941-1459 (Fax)

Minna Yu

Ball State University ( email )

United States
765-285-5108 (Phone)
765-285-4312 (Fax)

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