Analysts’ Cash Flow Forecasts are Not Sophisticated: a Rebuttal of Call, Chen and Tong (2013)
August 3, 2013 Leave a comment
Analysts’ Cash Flow Forecasts are Not Sophisticated: a Rebuttal of Call, Chen and Tong (2013)
Dan Givoly Pennsylvania State University – Mary Jean and Frank P. Smeal College of Business Administration
Carla Hayn University of California at Los Angeles – Anderson School of Management
Reuven Lehavy University of Michigan – Stephen M. Ross School of Business
July 2013
Abstract:
Call, Chen and Tong (2013) claim that the conclusion we reached in Givoly, Hayn and Lehavy (2009) that analysts’ forecasts of cash flow from operations are unsophisticated (in the sense that they can be replicated by a naïve extension of analysts’ own earnings forecasts) is wrong. They conclude that these forecasts are, in fact, sophisticated. Call et al.’s claim is based on inappropriate and contradictory tests and their interpretation of their own evidence suffers from serious logical flaws. In fact, rather than raising doubts about our conclusions, the evidence in Call et al. reinforces them.
Are Analysts’ Cash Flow Forecasts Naive Extensions of Their Own Earnings Forecasts?
Andrew C. Call Arizona State University (ASU) – School of Accountancy
Shuping Chen University of Texas at Austin – Red McCombs School of Business
Yen H. Tong Nanyang Technological University (NTU) – Nanyang Business School
March 1, 2012
Abstract:
We examine the sophistication of analysts’ cash flow forecasts to better understand what accrual adjustments, if any, analysts make when forecasting cash flows. As a preliminary step, we first demonstrate that prior empirical tests used to evaluate the sophistication of analysts’ cash flow forecasts are not diagnostic. We then present three sets of evidence to triangulate our conclusion that analysts’ cash flow forecasts incorporate meaningful accrual adjustments. First, we review a stratified random sample of 90 analyst reports and find that the majority of these analysts include explicit adjustments for working capital and other accruals in their cash flow forecasts. Second, using a large sample of analysts’ cash flow forecasts from 1993-2008, we find that these forecasts outperform time-series cash flow forecasts in correctly predicting the sign and magnitude of accruals. Finally, we find a significant market reaction to analysts’ cash flow forecast revisions, suggesting that investors find these revisions informative. Collectively, our findings demonstrate that analysts’ cash flow forecasts are not simply naïve extensions of their own earnings forecasts, but that they reflect meaningful and useful accrual adjustments. These findings are relevant to researchers who examine analysts’ cash flow forecasts in a variety of settings, and to investors and practitioners who employ these forecasts for valuation purposes.
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