The purpose of this study is to examine the sophistication (accuracy, bias, informativeness for changes in accruals) and market pricing of analysts’ cash flow forecasts for Eurozone listed firms and the effects of financial distress and auditor quality.
Accuracy/bias is investigated using analysts’ cash flow forecast errors. The naïve extrapolation model is used to examine the forecasts’ informativeness for working capital changes. A total return model is used to examine value-relevance. This study controls for the forecast horizon, using the Altman z-score and a BigN/industry specialization auditor indicator to proxy for distress and auditor quality, respectively.
Analysts efficiently adjust earnings forecasts for depreciation during cash flow forecast formation but fail to efficiently incorporate working capital changes. Findings indicate cash flow forecasts’ accuracy improves for distressed firms and firms of high auditor quality, attributed to analyst conservatism and accounting choices and more accurate earnings forecasts, respectively. Cash flow forecasts’ value-relevance increases for distressed firms, particularly those of high auditor quality and timely forecasts.
To the best of the authors’ knowledge, this study is the first to examine analysts’ cash flow forecasts taking into consideration financial distress and auditor quality, controlling for the analyst forecast horizon.
