Do Analysts Use Their Cash Flows Forecasts When Setting Target Prices?

Abstract

This study examines whether analysts’ decisions to issue cash flows forecasts depend endogenously on their decision to use these forecasts to set target prices. An endogenous switching regression model, with analyst report regimes of disclosure and non-disclosure of cash flow forecasts, shows that cash flow revisions are more important than earnings revisions in explaining the magnitude of target price revisions in the cash flow disclosure regime. Cash flow forecasts influence and are influenced by analyst valuation choices. Additional analysis shows that cash flow-based pseudo-target prices play a greater role in explaining target price implied returns than do earnings-based pseudo-target prices. These findings provide insights into analysts’ valuation decision processes.