Analyst cash flow forecasts and pricing of accruals |
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Authors: | Linna Shi Huai Zhang Jun Guo |
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Institution: | 1. School of Management, State University of New York at Binghamton, 4400 Vestal Pkwy E, Binghamton, NY 13902, United States;2. Nanyang Business School, Nanyang Technological University, 50 Nanyang Avenue, Singapore 639798, Singapore;3. School of Business, Rutgers University-Camden, 227 Penn Street, Camden, NJ 08102, United States |
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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. |
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Keywords: | Accruals Accrual anomaly Cash flow forecasts Pricing Earnings manipulation |
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