Further Evidence on Analyst and Investor Mis-Weighting of Prior Period Cash Flows and Accruals

46 Pages Posted: 23 Jun 2003

See all articles by Anwer S. Ahmed

Anwer S. Ahmed

Texas A&M University - Mays Business School

Frank Zhang

Yale School of Management

Khalid Nainar

McMaster University - Michael G. DeGroote School of Business

Date Written: May 2003

Abstract

Prior studies find that (i) investors over-weight (or over-estimate the persistence of) past accruals and under-weight past cash flows, and (ii) analysts over-weight past accruals. We study financial analysts' and investors' assessments of the persistence of accruals and cash flows after explicitly controlling for the negative correlation between accruals and cash flows. We find that both analysts and investors under-weight past cash flows but over-weight past accruals. The accrual and cash flow effects are distinct from each other in the sense that when we control for one effect, the other effect continues to be significant. However, the cash flow effect on both forecast errors and future stock returns is much stronger, in terms of magnitude, than the accrual effect. The strength of the cash flow effect has not been generally recognized in the literature.

Keywords: market efficiency, analyst forecast efficiency, accruals, cash flows

JEL Classification: G14, M41, G29

Suggested Citation

Ahmed, Anwer S. and Zhang, Frank and Nainar, S. M. Khalid, Further Evidence on Analyst and Investor Mis-Weighting of Prior Period Cash Flows and Accruals (May 2003). Available at SSRN: https://ssrn.com/abstract=410501 or http://dx.doi.org/10.2139/ssrn.410501

Anwer S. Ahmed (Contact Author)

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4353
United States

Frank Zhang

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

S. M. Khalid Nainar

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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