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Do analysts’ cash flow forecasts improve their target price accuracy?

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Do analysts’ cash flow forecasts improve their target price accuracy? / Hashim, Noor Abdelgadir Ahmed; Strong, Norman.

In: Contemporary Accounting Research, Vol. 35, No. 4, 12.2018, p. 1816-1842.

Research output: Contribution to journalJournal article

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Hashim, NAA & Strong, N 2018, 'Do analysts’ cash flow forecasts improve their target price accuracy?', Contemporary Accounting Research, vol. 35, no. 4, pp. 1816-1842. https://doi.org/10.1111/1911-3846.12369

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Hashim, Noor Abdelgadir Ahmed ; Strong, Norman. / Do analysts’ cash flow forecasts improve their target price accuracy?. In: Contemporary Accounting Research. 2018 ; Vol. 35, No. 4. pp. 1816-1842.

Bibtex

@article{dd9adc2a17cd4195b7f9ccc02c4e1804,
title = "Do analysts{\textquoteright} cash flow forecasts improve their target price accuracy?",
abstract = "The literature on the usefulness of analysts{\textquoteright} cash flow forecasts is unsettled, with Call et al. (2009), Mohanram (2014), and Radhakrishnan and Wu (2014) providing evidence in favor of their usefulness, and Givoly et al. (2009), Bilinski (2014), and Ecker and Schipper (2014) questioning this. Target prices provide a good setting to test the usefulness of cash flow forecasts because they are an ultimate output of an analyst's valuation process to which cash flow forecasts are an input. Moreover, studying the effect of cash flow forecasts on target prices is more relevant for assessing their usefulness than is studying their effect on earnings forecast accuracy, as the accuracy of target prices requires a comparison with market prices, which are less subject to management influence than reported earnings. By improving an analyst's understanding of unexpected accruals and permanent earnings, a cash flow forecast can increase an analyst's target price accuracy and signal an analyst's superior forecasting ability. We examine whether, conditional on their earnings forecasts, analysts{\textquoteright} cash flow forecasts improve their target price accuracy. We find that when analysts issue cash flow forecasts, their target price accuracy increases. We also find that this accuracy increases with the accuracy of their cash flow forecasts. Finally, we find that this increased target price accuracy is greater for more challenging-to-value firms. Our study provides confirmatory evidence of the usefulness of analysts{\textquoteright} cash flow forecasts.",
author = "Hashim, {Noor Abdelgadir Ahmed} and Norman Strong",
year = "2018",
month = dec
doi = "10.1111/1911-3846.12369",
language = "English",
volume = "35",
pages = "1816--1842",
journal = "Contemporary Accounting Research",
issn = "0823-9150",
publisher = "Wiley-Blackwell",
number = "4",

}

RIS

TY - JOUR

T1 - Do analysts’ cash flow forecasts improve their target price accuracy?

AU - Hashim, Noor Abdelgadir Ahmed

AU - Strong, Norman

PY - 2018/12

Y1 - 2018/12

N2 - The literature on the usefulness of analysts’ cash flow forecasts is unsettled, with Call et al. (2009), Mohanram (2014), and Radhakrishnan and Wu (2014) providing evidence in favor of their usefulness, and Givoly et al. (2009), Bilinski (2014), and Ecker and Schipper (2014) questioning this. Target prices provide a good setting to test the usefulness of cash flow forecasts because they are an ultimate output of an analyst's valuation process to which cash flow forecasts are an input. Moreover, studying the effect of cash flow forecasts on target prices is more relevant for assessing their usefulness than is studying their effect on earnings forecast accuracy, as the accuracy of target prices requires a comparison with market prices, which are less subject to management influence than reported earnings. By improving an analyst's understanding of unexpected accruals and permanent earnings, a cash flow forecast can increase an analyst's target price accuracy and signal an analyst's superior forecasting ability. We examine whether, conditional on their earnings forecasts, analysts’ cash flow forecasts improve their target price accuracy. We find that when analysts issue cash flow forecasts, their target price accuracy increases. We also find that this accuracy increases with the accuracy of their cash flow forecasts. Finally, we find that this increased target price accuracy is greater for more challenging-to-value firms. Our study provides confirmatory evidence of the usefulness of analysts’ cash flow forecasts.

AB - The literature on the usefulness of analysts’ cash flow forecasts is unsettled, with Call et al. (2009), Mohanram (2014), and Radhakrishnan and Wu (2014) providing evidence in favor of their usefulness, and Givoly et al. (2009), Bilinski (2014), and Ecker and Schipper (2014) questioning this. Target prices provide a good setting to test the usefulness of cash flow forecasts because they are an ultimate output of an analyst's valuation process to which cash flow forecasts are an input. Moreover, studying the effect of cash flow forecasts on target prices is more relevant for assessing their usefulness than is studying their effect on earnings forecast accuracy, as the accuracy of target prices requires a comparison with market prices, which are less subject to management influence than reported earnings. By improving an analyst's understanding of unexpected accruals and permanent earnings, a cash flow forecast can increase an analyst's target price accuracy and signal an analyst's superior forecasting ability. We examine whether, conditional on their earnings forecasts, analysts’ cash flow forecasts improve their target price accuracy. We find that when analysts issue cash flow forecasts, their target price accuracy increases. We also find that this accuracy increases with the accuracy of their cash flow forecasts. Finally, we find that this increased target price accuracy is greater for more challenging-to-value firms. Our study provides confirmatory evidence of the usefulness of analysts’ cash flow forecasts.

U2 - 10.1111/1911-3846.12369

DO - 10.1111/1911-3846.12369

M3 - Journal article

VL - 35

SP - 1816

EP - 1842

JO - Contemporary Accounting Research

JF - Contemporary Accounting Research

SN - 0823-9150

IS - 4

ER -