Abstract
We investigate the implications of firms’ benchmark-beating pattern with respect to analysts’ quarterly cash flow forecasts for current capital market valuation and future firm performance. We contend that nonnegative earnings surprises are more likely to be supported by real operating performance and signal higher earnings quality if they are achieved via higher than expected cash flows or lower than expected accruals. We show that firms beating analyst earnings forecasts experience larger positive capital market reactions and larger earnings response coefficients if they beat analyst cash flow forecasts or report lower than expected accruals. We show that superior future firm performance provides an economic justification for the more favorable capital market response obtained by these firms. Our findings suggest that firms’ ability to beat analyst cash flow forecasts is informative regarding the quality of earnings surprises.
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