Abstract DeFond and Hung [DeFond, M., & Hung, M. (2007). Review of
Accounting Studies, 12 (this issue)] 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 fore-
casts. 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 Æ Investor protection Æ Legal system Æ
Earnings quality Æ Analyst forecasts Æ Cash ﬂows
JEL Classiﬁcations G15 Æ G18 Æ G38 Æ M41
L. Hail (&)
The Wharton School, University of Pennsylvania, 3620 Locust Walk, Philadelphia,
PA 19104, USA
Rev Acc Stud (2007) 12:421–441
Discussion of investor protection and analysts’ cash
ﬂow forecasts around the world
Published online: 9 March 2007
Springer Science+Business Media, LLC 2007