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An Empirical Analysis of Analysts' Cash Flow Forecasts

This study investigates the relatively recent and growing trend in analysts making operating cash flow forecasts. We find that 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. Specifically, consistent with our expectations, we find that cash flow forecasts are more likely to be made for firms: (1) in industries with greater accounting choice heterogeneity; (2) with forecasted earnings losses;(3) with shorter operating cycles; (4) with greater capital intensity; and (5) with higher leverage. 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 flow forecasts when current cash flows have greater ability, and earnings have less ability, to predict future cash flows; when annual earnings have a lower association with stock returns; and when cash flow forecast errors are associated with stock returns around the earnings announcement date, but earnings forecast errors are not.