To beat or not to beat? The importance of analysts’ cash flow forecasts

To beat or not to beat? The importance of analysts’ cash flow forecasts We investigate the implications of firms’ benchmark-beating patterns with respect to analysts’ quarterly cash flow forecasts for firms’ current capital market valuation and their future performance. We hypothesize that nonnegative earnings surprises are more likely to be supported by real operating performance and signal higher earnings quality if they are achieved via higher than expected cash flows or lower than expected accruals. We show that firms beating analyst earnings forecasts have larger positive capital market reactions and larger earnings response coefficients if they beat analyst cash flow forecasts or report lower than expected accruals. We also demonstrate that these firms’ superior future performance may provide an economic justification for their more favorable market response. Our findings suggest that firms’ ability to beat analyst cash flow forecasts is informative regarding the quality of their earnings surprises. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

To beat or not to beat? The importance of analysts’ cash flow forecasts

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Publisher
Springer US
Copyright
Copyright © 2013 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-012-0330-z
Publisher site
See Article on Publisher Site

Abstract

We investigate the implications of firms’ benchmark-beating patterns with respect to analysts’ quarterly cash flow forecasts for firms’ current capital market valuation and their future performance. We hypothesize that nonnegative earnings surprises are more likely to be supported by real operating performance and signal higher earnings quality if they are achieved via higher than expected cash flows or lower than expected accruals. We show that firms beating analyst earnings forecasts have larger positive capital market reactions and larger earnings response coefficients if they beat analyst cash flow forecasts or report lower than expected accruals. We also demonstrate that these firms’ superior future performance may provide an economic justification for their more favorable market response. Our findings suggest that firms’ ability to beat analyst cash flow forecasts is informative regarding the quality of their earnings surprises.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Jan 16, 2013

References

  • The rewards to meeting or beating earnings expectations
    Bartov, E; Givoly, D; Hayn, C
  • Accounting discretion, corporate governance, and firm performance
    Bowen, R; Rajgopal, S; Venkatachalam, M
  • To what extent does the financial reporting process curb earnings surprise games?
    Brown, L; Pinello, A
  • Do core and non-core cash flows from operations persist differentially in predicting future cash flows?
    Cheng, A; Hollie, D
  • Corporate governance, chief executive officer compensation, and firm performance
    Core, J; Holthausen, R; Larcker, D

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