The Effect of Cash Flow Forecasts on Accrual Quality and Benchmark Beating
52 Pages Posted: 8 Aug 2006 Last revised: 12 Apr 2011
Date Written: October 28, 2010
Abstract
When analysts provide forecasts of both earnings and operating cash flow, they also implicitly provide a forecast of total operating accruals. We posit that this increases the transparency and the expected costs of accrual manipulations used to manage earnings. As a consequence, we predict and find that accrual quality improves and firms’ propensity to meet or beat earnings benchmarks declines following the provision of cash flow forecasts. We also predict and find that firms turn to other benchmark-beating mechanisms, such as real activities manipulation and earnings guidance in response to the provision of cash flow forecasts.
Keywords: Earnings Management, Cash Flow Forecast, Analyst Forecast, Benchmarks
JEL Classification: G12, G29, M41, N20
Suggested Citation: Suggested Citation
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