Analysts’ Cash Flow Forecasts are Not Sophisticated: a Rebuttal of Call, Chen and Tong (2013)

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

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

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.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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