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The effect of cash flow forecasts on accrual quality and benchmark beating
Authors:John McInnis  Daniel W Collins  
Institution:a McCombs School of Business, The University of Texas at Austin, Austin, TX, USA;b Henry B. Tippie Research Chair in Accounting, Tippie College of Business, The University of Iowa, Iowa City, IA, USA
Abstract:When analysts provide forecasts of both earnings and operating cash flow, they also implicitly provide a forecast of total operating accruals. We posit that this increases the transparency and the expected costs of accrual manipulations used to manage earnings. As a consequence, we predict and find that accrual quality improves and firms’ propensity to meet or beat earnings benchmarks declines following the provision of cash flow forecasts. We also predict and find that firms turn to other benchmark-beating mechanisms, such as real activities manipulation and earnings guidance in response to the provision of cash flow forecasts.
Keywords:Cash flow forecasts  Earnings management  Accrual quality
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