The Role Of Earnings Quality In Financial Analyst Forecast Accuracy

Abstract

This study investigates the impact that the quality of reported earnings has on the accuracy of financial analysts’ earnings forecasts.  Extant research indicates that earnings attributes are important considerations to users of accounting information.  One such attribute is earnings quality; often measured as the magnitude of accruals that do not convert to cash in a timely manner, where a poor match of cash flows and accruals indicates low earnings quality.  Such accruals could reduce the usefulness of financial reports.  This study uses two measurements of forecast accuracy to assess the impact that earnings quality has on the forecast accuracy of financial analysts.  Following prior research, one measurement considers the environment in which the analyst operates and compares their accuracy to that of their peers.  The second compares the individual analyst forecast to the actual reported earnings.  For both measurements of accuracy the results show that higher earnings quality is associated with improved forecast accuracy.