Abstract

We test predictions relating to the role of financial analysts in aiding investors ’ assessment of the different valuation implications of the cash flow and accrual components of earnings. First, we examine whether analysts revise their forecasts of future earnings in anticipation of predictable accrual reversals. Then, we examine whether share prices reflect predictable accrual reversals differently depending on analyst activity. Our findings suggest that analysts act as sophisticated information intermediaries in that some analysts are able to identify firms with less persistent accruals. However, share prices do not reflect the information conveyed by analyst forecast revisions. Rather, investors appear to expect the same persistence in earnings, regardless of its cash flow and accrual components and regardless of analyst activity, until the accruals reverse. Thus, incorporating information from analyst activity substantially improves short-tem returns to an accrual-based trading strategy.

Citations