Discussion of Investor Protection and Analysts' Cash Flow Forecasts Around the World

26 Pages Posted: 17 Jan 2007

See all articles by Luzi Hail

Luzi Hail

University of Pennsylvania - The Wharton School

Multiple version iconThere are 2 versions of this paper

Date Written: January 2007

Abstract

DeFond and Hung (2007) test the conjecture whether financial analysts, due to demand-side pressure, compensate for the limited usefulness of reported earnings by issuing cash flow forecasts. They find that analysts supplement their earnings forecasts more frequently with cash flow forecasts in countries where antidirector rights and legal enforcement quality are poor. In my discussion, I examine their hypothesis development and empirical research design and try to extend their arguments to a time-series setting. As it turns out, the paper's main contention critically hinges on two assumptions: (1) investors' unsatisfied demand for accounting information and (2) their willingness to rely on cash flow forecasts as valuable information signals. The descriptive validity of these assumptions in an international context is a priori not obvious. I then test whether substantial changes in investor protection and/or earnings quality relate to changes in the frequency of cash flow forecasts. My analyses show that analysts' propensity to issue cash flow forecasts increases after the first prosecution under insider trading laws, after non-U.S. firms have cross-listed their shares on a U.S. exchange, or after firms have voluntarily replaced their domestic accounting standards with IFRS or U.S. GAAP. Thus, I conclude that the reasoning behind the levels results does not simply extend to a changes setting.

Keywords: international accounting, investor protection, legal system, earnings quality, analyst forecasts, cash flows

JEL Classification: G15, G18, G29, G38, M41, M47

Suggested Citation

Hail, Luzi, Discussion of Investor Protection and Analysts' Cash Flow Forecasts Around the World (January 2007). Available at SSRN: https://ssrn.com/abstract=957243 or http://dx.doi.org/10.2139/ssrn.957243

Luzi Hail (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-8205 (Phone)
215-573-2054 (Fax)

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