Do Analysts’ Cash Flow Forecasts Encourage Managers to Enhance Real Cash Flows? Evidence from Tax Planning

Abstract

Recent research finds that analysts' cash flow forecasts have meaningful financial reporting ramifications, but to date, the identified effects are unlikely to yield meaningful cash flow benefits. This study examines whether analysts' cash flow forecasts encourage managers to enhance the firm's cash flow position through tax avoidance activities. We evaluate the change in cash tax avoidance after analysts begin issuing cash flow forecasts relative to a propensity-score matched control sample without cash flow forecasts. Consistent with analysts' cash flow forecasts encouraging tax avoidance that enhances real cash flows, we find a negative association between cash effective tax rates and analysts' cash flow coverage. Additional analysis suggests this association is driven both by strategies to permanently avoid and to defer tax payments, and that increased cash tax avoidance activity represents a significant component of the overall increase in reported operating cash flows after the initiation of analysts' cash flow coverage.