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Do Analysts Disclose Cash Flow Forecasts with Earnings Estimates when Earnings Quality is Low?

39 citations0/0 files storedJournal of Business Finance &amp Accounting

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Auditing, Earnings Management, Governance Financial Analysis and Corporate Governance Forecasting Techniques and Applications

Abstract

Abstract Cash flows are incrementally useful to earnings in security valuation mainly when earnings quality is low. This suggests that when earnings quality decreases, analysts will be more likely to supplement their earnings forecasts with cash flow estimates. Contrary to this prediction, we find that analysts do not disclose cash flow forecasts when the quality of earnings is low. This is because cash flow forecast accuracy depends on the accuracy of the accrual estimates and the precision of accrual forecasts decreases for firms with low quality earnings. Consequently, as earnings quality decreases, cash flow forecasts become increasingly inaccurate compared to earnings estimates. Cash flow estimates that lack reliability are not useful to investors and, consequently, unlikely to be reported by analysts. This result provides an explanation for why analysts are less likely to report cash flow estimates when earnings quality is low.

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References

1993Common risk factors in the returns on stocks and bonds 1992The Cross-Section of Expected Stock Returns 1973Risk, Return, and Equilibrium: Empirical Tests 2008Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches 1991Earnings Management During Import Relief Investigations 2001Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature 2002The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors 2010Understanding earnings quality: A review of the proxies, their determinants and their consequences

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