The Role of Analysts' Cash Flow Forecasts in the Decline of the Accruals Anomaly
Speaker
Abstract
| The accruals anomaly, demonstrated by Sloan (1996), generated significant excess returns consistently for over four decades until 2002. Since then, the accruals anomaly has apparently disappeared. In this paper, I argue that one factor responsible for this decline is the increasing incidence of analysts’ cash flow forecasts which has provided markets with information about likely future accruals. The negative relationship between accruals and future returns is significantly weaker in the presence of cash flow forecasts. This anomalous relationship becomes weaker with the initiation of cash flow forecasts and stronger with the termination of cash flow forecasts. Further, the mitigating effect of cash flow forecasts is greater for forecasts that are exante more likely to be accurate or ex-post most accurate. The explanation is incremental to explanations based on the improved quality of accruals, reduced manipulation of special items and restructuring charges and the greater investment in accruals strategies by hedge funds. The results highlight the increasing importance of analysts’ cash flow forecasts in the appropriate valuation of stocks. |
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|
Paolo Perego |
