Analysts' Cash Flow Forecasts and Accrual Mispricing

This study examines whether accrual mispricing is less for firms whose analysts provide both earnings and cash flow forecasts than for firms whose analysts provide only earnings forecasts. When analysts provide cash flow forecasts along with earnings forecasts, they implicitly also provide accrual forecasts. Based on Hirshleifer and Teoh's (2006) investors' limited attention argument, we hypothesize and find that accrual mispricing is less for earnings and cash flow forecast firms than for earnings forecast firms after controlling for various factors that have been shown to be associated with the accrual anomaly. The results are consistent with the notion that analysts' cash flow forecasts redirect investors' attention toward the accrual components of earnings, and investors therefore misprice accruals less. Broadly speaking, our findings show a conduit for how analysts' information helps to improve the information environment.