Bond Analysts' Forecasts on Cash Flows and Earnings

Abstract

We examine the propensity and properties of bond analysts’ forecasts on cash flows and earnings. We find that the probability to issue cash flow, relative to earnings, forecasts is greater for bond analysts than for equity analysts, consistent with the notion that cash flow, relative to earnings, information is more important to bond investors than for stock investors. In addition, bond analysts’ cash flow (earnings) forecasts are more (less) accurate than equity analysts’ cash flow (earnings) forecasts. Finally, we show that bond investors’ reaction to bond analysts’ cash flow forecast revision is greater than that to bond analysts’ earnings forecast and that bond market reacts only to bond analysts’ forecast revisions but not to equity analysts’ forecast revisions. This manifests bond investors’ stronger demand for reliable information on future cash flows than for earnings. Overall, this study enhances our understanding of bond analysts’ informational role through their forecasting activities.