Cross-Sectional Determinants of the Impact of Management Cash Flow Forecasts

Abstract

Prior research on the value relevance of management guidance focuses almost exclusively on earnings forecasts. However, in recent years managers have increasingly provided additional guidance in the form of cash flow forecasts, yet relatively little is known about the informativeness of these forecasts and their incremental value relevance beyond earnings forecasts. In this study, I show that managers’ cash flow forecasts are incrementally informative to investors. More importantly, these cash flow forecasts are increasingly value-relevant for firms 1) with bad news in forecasted earnings, 2) in financial distress, 3) with higher growth opportunities, and 4) with relatively higher value relevance of reported cash flows. I also find that managers’ cash flow forecasts are incorporated into analysts’ forecasts, and are especially useful to analysts following firms with bad earnings news in management forecasts and those with relatively higher value relevance of reported cash flows. Additionally, the evidence is consistent with cash flow forecasts reducing analysts’ forecast error and dispersion. This study contributes to the voluntary disclosure literature by investigating the impact of a relatively new form of disclosure. I provide evidence that the impact varies predictably based on cross-sectional differences in firm characteristics.