Do Analysts’ Cash Flow Forecasts Improve the Accuracy of Their Target Prices?

49 Pages Posted: 18 Jun 2016

See all articles by Noor Hashim

Noor Hashim

Lancaster University Management School

Norman C. Strong

University of Manchester - Alliance Manchester Business School

Date Written: June 16, 2016

Abstract

Current evidence on the sophistication of analysts’ cash flow forecasts is ambiguous. For example, Call et al. (2009) show that issuing cash flow forecasts has important benefits for analysts’ earnings forecasts, while Givoly et al. (2009) question the validity of this result, arguing that analysts’ cash flow forecasts are simple extrapolations of their earnings forecasts and provide limited incremental information. More recently, Mohanram (2014) and Radhakrishnan and Wu (2014) show that the increasing incidence of cash flow forecasts has helped mitigate accruals mispricing. We contribute to the debate on the usefulness of analysts’ cash flow forecasts and their effect on capital market outcomes by examining whether cash flow forecasts have incremental benefits over earnings for analysts’ valuation outcomes. We find that analysts who are better at forecasting cash flows are better at forecasting target prices, even after controlling for the quality of their earnings forecasts. Our study provides confirmatory evidence on the sophistication of analysts’ cash flow forecasts.

Keywords: Analysts, Cash flow forecasts, Target price accuracy, Valuation

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

Suggested Citation

Hashim, Noor and Strong, Norman Charles, Do Analysts’ Cash Flow Forecasts Improve the Accuracy of Their Target Prices? (June 16, 2016). Available at SSRN: https://ssrn.com/abstract=2797614

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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