The Effect of Cash Flow Forecasts on Accrual Quality and Benchmark Beating

52 Pages Posted: 8 Aug 2006 Last revised: 12 Apr 2011

See all articles by John M. McInnis

John M. McInnis

University of Texas at Austin - Department of Accounting

Daniel W. Collins

University of Iowa - Department of Accounting

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

McInnis, John M. and Collins, Daniel W., The Effect of Cash Flow Forecasts on Accrual Quality and Benchmark Beating (October 28, 2010). Journal of Accounting & Economics, Vol. 51, pp. 219-239, April 2011, Available at SSRN: https://ssrn.com/abstract=922770

John M. McInnis (Contact Author)

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-232-6791 (Phone)

Daniel W. Collins

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0912 (Phone)
319-335-1956 (Fax)

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