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Analyst reaction to non-articulation between the balance sheet and the statement of cash flows

Analyst reaction to non-articulation between the balance sheet and the statement of cash flows The purpose of this paper is to investigate the effect of non-articulation on analyst earnings forecast quality. The authors look for evidence on the relationship between non-articulation and analyst earnings forecast properties: forecast inaccuracy, forecast dispersion and forecast bias.Design/methodology/approachThe empirical tests are primarily based analyst earnings and cash flow forecasts covered by Institutional Broker Estimate System and financial statement information obtained from Compustat North America database.FindingsThe authors hypothesize and find that non-articulation is positively related to analyst forecast dispersion, forecast accuracy and forecast bias for one-year ahead of earnings. The effects of non-articulation on analyst earnings forecast inaccuracy and bias are neutralized when the analyst issues a cash flow forecast and when such forecast provides accurate information regarding the forecasted firm’s operating cash flow. On the other hand, cash flow forecast issuance alone does not mitigate the negative influence of non-articulation.Research limitations/implicationsThe sample selection procedure limits the generalizability of the findings.Practical implicationsThe findings confirm CFA Institute and prior research asserting that non-articulation deteriorates the quality of earnings forecasts by financial statement users (more specifically, the financial analysts). The authors add to the literature by documenting that accurate cash flow forecasts help analysts mitigate the negative influence of non-articulation on earnings forecast quality.Originality/valueIt remains an empirical question whether non-articulation between the balance sheet and the statement of cash flows has an effect on financial statement users’ ability to assimilate financial information. The paper highlights the detrimental effect of non-articulation by documenting the relationship between the non-articulation and the quality of earnings expectation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Applied Accounting Research Emerald Publishing

Analyst reaction to non-articulation between the balance sheet and the statement of cash flows

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
0967-5426
DOI
10.1108/jaar-02-2019-0036
Publisher site
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Abstract

The purpose of this paper is to investigate the effect of non-articulation on analyst earnings forecast quality. The authors look for evidence on the relationship between non-articulation and analyst earnings forecast properties: forecast inaccuracy, forecast dispersion and forecast bias.Design/methodology/approachThe empirical tests are primarily based analyst earnings and cash flow forecasts covered by Institutional Broker Estimate System and financial statement information obtained from Compustat North America database.FindingsThe authors hypothesize and find that non-articulation is positively related to analyst forecast dispersion, forecast accuracy and forecast bias for one-year ahead of earnings. The effects of non-articulation on analyst earnings forecast inaccuracy and bias are neutralized when the analyst issues a cash flow forecast and when such forecast provides accurate information regarding the forecasted firm’s operating cash flow. On the other hand, cash flow forecast issuance alone does not mitigate the negative influence of non-articulation.Research limitations/implicationsThe sample selection procedure limits the generalizability of the findings.Practical implicationsThe findings confirm CFA Institute and prior research asserting that non-articulation deteriorates the quality of earnings forecasts by financial statement users (more specifically, the financial analysts). The authors add to the literature by documenting that accurate cash flow forecasts help analysts mitigate the negative influence of non-articulation on earnings forecast quality.Originality/valueIt remains an empirical question whether non-articulation between the balance sheet and the statement of cash flows has an effect on financial statement users’ ability to assimilate financial information. The paper highlights the detrimental effect of non-articulation by documenting the relationship between the non-articulation and the quality of earnings expectation.

Journal

Journal of Applied Accounting Research – Emerald Publishing

Published: Feb 5, 2020

Keywords: Cash flow forecast; Articulation errors; Earnings forecast; Non-articulation

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