Improving Investors' Forecast Accuracy when Operating Cash Flows and Accruals Are Differentially Persistent

Abstract

ABSTRACT: This study uses an experiment to examine (1) what factors give rise to investors' inability to fully incorporate operating cash flows and accruals into their earnings forecasts, and (2) what conditions help to improve investors' forecast accuracy when operating cash flows and accruals exhibit differential persistence. I investigate how decomposing the forecasting task and altering the presentation format combine to enable analysts and nonprofessional investors to acquire and accurately process financial statement information when operating cash flows and accruals are differentially persistent. I find that the earnings forecasts of analysts and M.B.A. students are more accurate only when participants are required to provide separate forecasts for operating cash flows and accruals and the income statement is altered to present the disaggregated cash and accrual components of earnings.

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