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The implications of cash flow forecasts for investors' pricing and managers' reporting of earnings
Andrew C. Call,
University Of Georgia
ABSTRACT. I examine the role of analysts’ cash flow forecasts on both investors’ use and managers’ reporting of earnings. I find that investors place more (less) weight on the cash (accrual) component of earnings for firms with a cash flow forecast, and that this weighting is a function of firm-specific factors predicted to affect the usefulness of the underlying cash flow information. I also find that for firms with a cash flow forecast, the cash (accrual) component of earnings is more (less) predictive of future firm prospects, consistent with analysts successfully choosing firms for which to issue a cash flow forecast. Lastly, I document that managers are more likely to opportunistically boost operating cash flows if the firm has a cash flow forecast, consistent with the notion that the nature of the capital market pressure affects the mechanism through which earnings are managed.
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