Do analysts disclose cash flow forecasts with earnings estimates when earnings quality is low?

Bilinski, P. (2014). Do analysts disclose cash flow forecasts with earnings estimates when earnings quality is low?. Journal of Business Finance and Accounting, 41(3/4), pp. 401-434. doi: 10.1111/jbfa.12056

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Abstract

Cash flows are incrementally useful to earnings in security valuation mainly when earnings quality is low. This suggests that when earnings quality decreases, analysts will be more likely to supplement their earnings forecasts with cash flow estimates. Contrary to this prediction, we find that analysts do not disclose cash flow forecasts when the quality of earnings is low. This is because cash flow forecast accuracy depends on the accuracy of the accrual estimates and the precision of accrual forecasts decreases for firms with low quality earnings. Consequently, as earnings quality decreases, cash flow forecasts become increasingly inaccurate compared to earnings estimates. Cash flow estimates that lack reliability are not useful to investors and, consequently, unlikely to be reported by analysts. This result provides an explanation for why analysts are less likely to report cash flow estimates when earnings quality is low.

Item Type: Article
Additional Information: This is the accepted version of the following article: Bilinski, P. (2014), Do Analysts Disclose Cash Flow Forecasts with Earnings Estimates when Earnings Quality is Low?. Journal of Business Finance & Accounting, 41: 401–434, which has been published in final form at htp://dx.doi.org/10.1111/jbfa.12056
Uncontrolled Keywords: Analyst earnings and cash flow forecasts, Cash flow forecast accuracy, Earnings quality, Price reaction to earnings and cash flow forecast announcements
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Finance
URI: http://openaccess.city.ac.uk/id/eprint/7555

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