The Informativeness Of Cash Flow Forecasts And The Regulation FD Environment

Abstract

Prior literature shows that analysts’ forecast estimates serve as a proxy for the markets’ and investors’ beliefs which are unobservable. For decades, analysts have generated forecasts for use in valuation models including future estimates of earnings and growth. Yet, only recently, analysts have begun to voluntarily provide cash flow per share forecasts at the same time they are producing earnings per share forecasts for firms they follow. This study addresses whether the tendency of analysts to issue cash flow per share forecasts, as a result of changes in the regulatory environment, affects forecast properties. By examining the time frame surrounding Regulation FD, the analysis provides evidence that both the mere existence and the relative measure of analysts’ cash flow per share forecasts differ in explaining analysts’ earnings forecast accuracy. Specifically, the empirical results demonstrate that the relative value of analysts’ cash flow forecasts, the implied value of unexpected accruals, and cash flow forecast errors facilitate the reduction in analysts’ earnings forecast errors subsequent to the passage of Regulation FD. Further, the inverse relation between these analysts’ inputs and earnings forecast errors appear to be driven by firms with more accurate cash flow forecasts.