Analysts’ Cash Flow Forecasts and the Underreaction to Earnings Forecast Revisions

We examine how cash flow forecasts affect the market reaction to analysts’ earnings forecast revisions and, in particular, the post earnings forecast revision drift. We find that the initial market reaction to earnings forecast revisions is stronger when cash flow forecasts are available. The magnitude of the stock price drift following earnings forecast revisions, measured three months after the earnings forecast revision, is substantially mitigated when cash flow forecasts are available. Our findings are consistent with the view that cash flow forecasts provide useful information to market participants. By providing information on the composition of earnings, cash flow forecasts help to reduce information uncertainty and increase the salience and the reliability of the earnings forecast revision. Accordingly, the availability of cash flow forecasts affects how investors process earnings news. Our results extend prior research on the post earnings forecast revision drift and contribute to prior research on the usefulness of cash flow forecasts