Estimation and Prediction Tests of Cash Flow Forecast Accuracy

Abstract

Recently, analysts' cash flow forecasts have become widely available through financial information services. Cash flow information enables practitioners to better understand the real operating performance and financial stability of a company, particularly when earnings information is noisy and of low quality. However, research suggests that analysts' cash flow forecasts are less accurate and more dispersed than earnings forecasts. We thus investigate factors influencing cash flow forecast accuracy and build a practical model to distinguish more accurate from less accurate cash flow forecasters, using past cash flow forecast accuracy and analyst characteristics. We find significant power in our cash flow forecast accuracy prediction models. We also find that analysts develop cash flow-specific forecasting expertise and knowhow, which are distinct from those that analysts acquire from forecasting earnings. In particular, cash flow-specific information is more useful in identifying accurate cash flow forecasters than earnings-specific information.Copyright (c) 2011 John Wiley & Sons, Ltd.