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Rational expectations tests on financial analysts’ cash flow forecasts

Ting He (College of Business, Lewis University, Romeoville, Illinois, USA)
Kenneth Zheng (Department of Accounting and Finance, University of Wyoming College of Business, Laramie, Wyoming, USA)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 26 November 2024

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Abstract

Purpose

This study investigates whether financial analysts process information efficiently when they make cash flow forecasts.

Design/methodology/approach

Using a sample of 3,967 observations spanning 2004–2016, we perform empirical analyses by regressing actual cash flows on previous cash flow forecasts for the current period and a vector of information variables known to the analysts at the time of the forecasts.

Findings

We find that analysts do not incorporate past stock returns or past cash flow information efficiently when they generate cash flow forecasts. We also find weak evidence that analysts do not incorporate past consensus cash flow forecasts or past accruals information when they generate cash flow forecasts.

Practical implications

Our findings contribute to the analyst forecast efficiency literature and highlight the difference between analyst cash flow forecast efficiency and earnings forecast efficiency.

Originality/value

While extant research on whether analysts use publicly available information efficiently when generating earnings forecasts documents mixed findings (e.g. DeBondt and Thaler, 1990; Abarbanell and Bernard, 1992; Basu and Markov, 2004; Evans et al., 2017), our results regarding analysts’ cash flow forecast efficiency are unambiguous.

Keywords

Citation

He, T. and Zheng, K. (2024), "Rational expectations tests on financial analysts’ cash flow forecasts", International Journal of Managerial Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJMF-03-2024-0162

Publisher

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Emerald Publishing Limited

Copyright © 2024, Emerald Publishing Limited

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