Analyst cash flow forecasts and pricing of accruals

Linna Shi, Huai Zhang, Jun Guo

Research output: Contribution to journalArticlepeer-review

5 Scopus citations

Abstract

This paper investigates how analyst cash flow forecasts affect investors' valuation of accounting accruals. We find that the strength of the accrual anomaly documented in Sloan (1996) is weaker for firms with analyst cash flow forecasts, after controlling for idiosyncratic risk, transaction costs and firm characteristics associated with the issuance of cash flow forecasts. We further show that this reduction in mispricing of accounting accruals is at least partially attributed to the improved ability of investors to price earnings manipulations imbedded in accruals. We investigate several non-mutually exclusive alternative explanations for this improvement in investors' ability and demonstrate that the increased investor attention and the improved accuracy of analyst earnings forecasts both contribute to the mitigation of the accrual anomaly.

Original languageEnglish (US)
Pages (from-to)95-105
Number of pages11
JournalAdvances in Accounting
Volume30
Issue number1
DOIs
StatePublished - Jun 2014

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance

Keywords

  • Accrual anomaly
  • Accruals
  • Cash flow forecasts
  • Earnings manipulation
  • Pricing

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