Information Acquisition Costs and Analysts’ Cash Flow Forecasts: The Role of Management Cash Flow Forecasts

Abstract

We examine whether the provision of managerial cash flow forecasts is a significant predictor of analysts’ decision to cover a firm with cash flow forecasts. Unlike managerial earnings forecasts, which are often issued to walk down analyst earnings estimates, managers issue cash flow forecasts to counter bad earnings news and lessen the cost of investor and analyst information acquisition (Wasley & Wu, 2006). Motivated by the increasing popularity of managerial cash flow forecasts and prior empirical evidence that analysts are less likely to follow a firm for which the costs of acquiring financial information are prohibitive (e.g., Liu, 2011), we predict and find that the provision of managerial cash flow forecasts is a significant determinant of the likelihood of analyst cash flow coverage. We also find that analysts are less likely to issue cash flow forecasts when the effort necessary to follow a firm is high. Together, the evidence suggests that the existence of management cash flow forecasts is an important determinant of analysts’ cash flow coverage.