Analysts’ vs. investors’ weightings of accruals in forecasting annual earnings

Abstract

This paper examines whether financial analysts’ forecasts of annual earnings reflect an over-weighting of working-capital accruals that is comparable to the over-weighting implicit in securities prices documented in Sloan [Account. Rev. 71 (1996) 289] and Bradshaw et al. [J. Account. Res. 39 (2001) 45]. Our results indicate that the over-weighting of working-capital accruals in analysts’ earnings forecasts is less than one-third of the over-weighting by investors that is implicit in stock prices. Moreover, we are able to attribute less than 40% of the delayed securities returns associated with working-capital accruals to subsequent errors in analysts’ annual earnings forecasts, for firms with lower analyst coverage. These findings suggest that securities market inefficiencies that are unrelated to financial analysts’ earnings forecasts underlie at least part of the accruals-related anomaly.