Do Analysts Strategically Employ Cash Flow Forecast Revisions to Offset Negative Earnings Forecast Revisions?

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We investigate whether analysts use cash flow forecasts to reduce the impact of earnings forecast revisions (EFRs) on market participants. In particular, we focus on conflict between an analyst's concurrent cash flow and earnings forecast revisions. We hypothesize and find that analysts are more likely to issue a positive cash flow forecast revision when they issue a negative earnings forecast revision concurrently, but not the opposite, particularly for Fortune 500 firms. Furthermore, our supplementary analyses suggest that (1) some analysts optimistically bias cash flow forecasts when they issue negative earnings forecast revisions; (2) the market pays less attention to the historical accuracy of analyst cash flow forecasts, so analysts have some latitude to present their cash flow forecasts in an optimistic way; and (3) the market reacts mainly to the direction, not the magnitude, of cash flow forecast revisions. Overall, these findings suggest that analysts may strategically use cash flow forecasts in conjunction with earnings forecasts to maintain good management relationships.
Publisher
ROUTLEDGE JOURNALS
Issue Date
2017
Language
English
Article Type
Article
Citation

EUROPEAN ACCOUNTING REVIEW, v.26, no.2, pp.193 - 214

ISSN
0963-8180
DOI
10.1080/09638180.2015.1123102
URI
http://hdl.handle.net/10203/223805
Appears in Collection
MT-Journal Papers(저널논문)
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