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Analysts’ Stock Recommendations, Cash Flow Valuations, and Stock Return Profitability

25 Pages Posted: 9 Sep 2015 Last revised: 4 Sep 2017

Alan J. Duboisée de Ricquebourg

University of Leeds - Leeds University Business School (LUBS)

Iain Clacher

University of Leeds - Leeds University Business School (LUBS)

Date Written: September 4, 2017

Abstract

We examine the relationship between analysts’ stock recommendations and cash flow forecasts, and whether these recommendations and cash flow forecasts provide investors with useful information to identify mispriced securities. In doing so, the paper contributes to the ongoing debate regarding the sophistication and value of analysts’ cash flow forecasts. Our findings show that analysts’ stock recommendations are informed by their cash flow forecasts when their forecasts are used in simple cash flow valuation heuristics. However, using these recommendations and heuristics to identify mispricing fails to earn investors excess returns. In contrast, we show that buy-and-hold investors earn significant excess returns by identifying mispricing using analysts’ cash flow forecasts in a discounted valuation model. Overall, we provide the first empirical evidence to suggest that, while analysts apparently fail to use their cash flow forecasts in a sophisticated valuation model, investors can use these forecasts in this manner to identify mispriced securities to earn significant excess returns.

Keywords: Analyst forecasts; Cash flows; Stock recommendations; Valuations

JEL Classification: G11, G17, G24

Suggested Citation

Duboisée de Ricquebourg, Alan J. and Clacher, Iain, Analysts’ Stock Recommendations, Cash Flow Valuations, and Stock Return Profitability (September 4, 2017). Available at SSRN: https://ssrn.com/abstract=2657078 or http://dx.doi.org/10.2139/ssrn.2657078

Alan J. Duboisée de Ricquebourg (Contact Author)

University of Leeds - Leeds University Business School (LUBS) ( email )

Leeds LS2 9JT
United Kingdom

Iain Clacher

University of Leeds - Leeds University Business School (LUBS) ( email )

Leeds LS2 9JT
United Kingdom

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