The Quality of Analysts’ Cash Flow Forecasts in China

Abstract

There is a growing literature discussing the incentives of analysts to disseminate cash flow forecasts and the quality of these forecasts. Most studies support the ‘demand hypothesis’ and suggest that cash flow forecasts contain information additional to that provided in earnings forecasts. In contrast, Givoly et al . (2009) show that cash flow forecasts are just a simple extrapolation of analysts’ earnings forecasts. In response to this challenge, Call et al (2013) point out that the regression tests in Givoly et al (2009) are non-diagnostic due to the measurement problem contained in the US dataset. We suggest that Givoly et al. ’s (2009) method can be well applied in China since Chinese data do not have the same measurement problem as that contained in US data. By replicating the studies of Givoly et al. (2009) and Call et al. (2013), we find results consistent with Givoly et al. (2009) that analysts’ cash flow forecasts appear to be naïve extensions of their earnings forecasts in China.