Changes in Analysts’ Accrual-Related Forecast Optimism after the Disappearance of the Accrual Anomaly

Abstract

ABSTRACT We investigate changes in analysts’ accrual-related forecast optimism after the disappearance of the accrual anomaly. We find that such optimism persists in the no-anomaly period, particularly when analysts’ incentives are aligned with greater optimism (i.e., for firms with high external financing). By contrast, the accrual-related forecast optimism declines when analysts’ incentives for optimism are low and in circumstances where analysts would have been more aware of accruals information after the anomaly became publicized (i.e., when analysts issued a cash flow forecast). These findings suggest that analysts’ incentives can offset forecast improvements that their heightened accrual awareness would otherwise allow. They also highlight the importance of considering both analysts’ incentives and knowledge when interpreting their forecasts. Data Availability: Data are available from sources identified in the text. JEL Classifications: G14; G29; M41.