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Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Do analysts’ cash flow forecasts improve their target price accuracy?
AU - Hashim, Noor Abdelgadir Ahmed
AU - Strong, Norman
PY - 2018/12/13
Y1 - 2018/12/13
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 -