Mark L. DeFond
University of Southern California
Mingyi Hung
University of Southern California
Abstract: We investigate the association between country-level institutional factors and analysts propensity to forecast cash flows. We predict that analysts provide cash flow forecasts to help investors overcome the effects of country-level institutional factors that limit earnings usefulness. Consistent with our hypotheses, we find evidence suggesting that analysts are more likely to forecast cash flows when: (1) weaker shareholder protection results in earnings that are less likely to reflect underlying economic performance; (2) lower Big 5 market share results in earnings that are more likely to be misstated; (3) poorer country-level credit rating makes earnings relatively less useful in assessing financial viability, and (4) more foreign investment creates a demand for additional information to help foreign investors interpret local GAAP. Our findings are consistent with information intermediaries responding to market-based incentives to help investors attenuate the adverse implications of country-level institutional factors. This finding contributes to the literature by, among other things, shedding light on the institutional determinants of analysts research activities and on the nature of the financial information they generate.
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