Why Analysts Issue Cash Flow Forecasts?
Asian Tax Journal Vol. 19 No. 1 (2018), pp. 9-31
Abstract
This study investigates relatively recent and growing trend in analyst making operating cash flow forecasts. We find cash flow forecasts are made for companies with accounting, operating and financing characteristics that are likely to make cash flows more helpful in interpreting earnings and assessing firm viability. We find that cash flow forecasts are more likely made for firms：(1) with lower accounting quality which is measured by accrual quality；(2) with greater capital intensity；(3) with forecasted earnings losses；and (4) larger firms. These findings suggest that market participants demand cash flow forecasts when cash flows are relatively more useful in assessing firm value. Supporting this explanation, we also find that analysts make cash flows forecasts when current cash flows have greater ability to predict future cash flows. However, we find there is no significant relationship between cash flow forecasts and stock returns around the earnings announcement date. Our paper contributes to the existing literature on analyst forecasts for listed firms on Korea Stock Exchange, the majority of which concentrate mainly on analyst earnings forecasts. Therefore, our findings provide important implications to not only investors and creditors but also regulators who are interested in analyst behavior in releasing cash flow forecasts for listed firms on Korea Stock Exchange. Researchers who are interested in this area can also apply the discussion in this paper for the related studies.
Keywords
- Analysts
- earning forecasts
- cash flow forecasts
- future cash flow
- stock returns
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