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Analyst cash flow forecasts and pricing of accruals

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  • Shi, Linna
  • Zhang, Huai
  • Guo, Jun

Abstract

This paper investigates how analyst cash flow forecasts affect investors' valuation of accounting accruals. We find that the strength of the accrual anomaly documented in Sloan (1996) is weaker for firms with analyst cash flow forecasts, after controlling for idiosyncratic risk, transaction costs and firm characteristics associated with the issuance of cash flow forecasts. We further show that this reduction in mispricing of accounting accruals is at least partially attributed to the improved ability of investors to price earnings manipulations imbedded in accruals. We investigate several non-mutually exclusive alternative explanations for this improvement in investors' ability and demonstrate that the increased investor attention and the improved accuracy of analyst earnings forecasts both contribute to the mitigation of the accrual anomaly.

Suggested Citation

  • Shi, Linna & Zhang, Huai & Guo, Jun, 2014. "Analyst cash flow forecasts and pricing of accruals," Advances in accounting, Elsevier, vol. 30(1), pages 95-105.
    • Handle: RePEc:eee:advacc:v:30:y:2014:i:1:p:95-105
    DOI: 10.1016/j.adiac.2014.04.006
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    1. Hyun Min Oh & Ho young Shin, 2019. "A Study on the Relationship between Analysts’ Cash Flow Forecasts Issuance and Accounting Information: Evidence from Korea," Sustainability, MDPI, vol. 11(12), pages 1-26, June.
    2. Ezzeddine Abaoub & Yosr Nouri, 2015. "Earnings Management And Analyst Coverage Changes Around Ifrs Implementation: Evidence From France," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 9(3), pages 83-94.

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