Transitory and persistent earnings components as reflected in analysts' short-term and long-term earnings forecasts: evidence from a nonlinear model

Mest, David P.; Plummer, Elizabeth

doi:10.1016/s0169-2070(98)00071-5

Cited by 18 publications

(8 citation statements)

References 22 publications

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“…There are several reasons why analysts cash flow forecasts can improve their target price accuracy. First, Mest and Plummer () find that analysts incorporate more persistent earnings components into longer‐term earnings forecasts, while Brown et al () and Bandyopadhyay et al () find that analysts’ long‐term earnings forecasts are more relevant than their short‐term earnings forecasts for stock prices and target prices. Separating permanent from transitory earnings components is a key challenge facing analysts (Ramnath et al ).…”

Section: Research Hypothesesmentioning

confidence: 99%

“…We hypothesize that an analyst's target price accuracy is higher if the analyst also provides a cash flow forecast, because cash flows are more persistent and therefore more relevant for target prices than are other earnings components. This builds on findings that analysts incorporate less transitory and more persistent earnings components into longer‐term earnings forecasts (Mest and Plummer ) and that analysts’ long‐term earnings forecasts are more relevant than their short‐term earnings forecasts for target prices (Bandyopadhyay et al ). We also expect forecasting cash flows to improve target price accuracy because analysts who issue cash flow forecasts signal their superior ability by forecasting cash flows, which are more difficult to forecast than earnings.…”

Section: Introductionmentioning

confidence: 98%

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Do Analysts’ Cash Flow Forecasts Improve Their Target Price Accuracy?

Hashim

Strong²

2018

Contemporary Accting Res

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The literature on the usefulness of analysts’ cash flow forecasts is unsettled, with Call et al. (), Mohanram (), and Radhakrishnan and Wu () providing evidence in favor of their usefulness, and Givoly et al. (), Bilinski (), and Ecker and Schipper () questioning this. Target prices provide a good setting to test the usefulness of cash flow forecasts because they are an ultimate output of an analyst's valuation process to which cash flow forecasts are an input. Moreover, studying the effect of cash flow forecasts on target prices is more relevant for assessing their usefulness than is studying their effect on earnings‐forecast accuracy, as the accuracy of target prices requires a comparison with market prices, which are less subject to management influence than reported earnings. By improving an analyst's understanding of unexpected accruals and permanent earnings, a cash flow forecast can increase an analyst's target price accuracy and signal an analyst's superior forecasting ability. We examine whether, conditional on their earnings forecasts, analysts’ cash flow forecasts improve their target price accuracy. We find that when analysts issue cash flow forecasts, their target price accuracy increases. We also find that this accuracy increases with the accuracy of their cash flow forecasts. Finally, we find that this increased target price accuracy is greater for more challenging‐to‐value firms. Our study provides confirmatory evidence of the usefulness of analysts’ cash flow forecasts.

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Section: Research Hypothesesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 98%

Do Analysts’ Cash Flow Forecasts Improve Their Target Price Accuracy?

Hashim

Strong²

2018

Contemporary Accting Res

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“…Prior empirical research and anecdotal evidence suggests reasons to expect that analysts assign different multiples to the components of restructuring charges across different forecast horizons. Mest and Plummer (1999), in their study of the permanent and transitory earnings components found in analysts' forecasts, report that the proportion of transitory earnings components in analysts' forecasts decreases as the forecast horizon is extended. This suggests that if differences exist among the components on the earnings permanence dimension, the components will be differentially informative to analysts across earnings forecast horizons.…”

Section: (I) Incremental Informativeness Of the Disaggregate Restructmentioning

confidence: 99%

Evidence on the Incremental Information Contained in the Components of Restructuring Charges

Lopez

2002

Business Fin & Account

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Among the new disclosures required by "EITF 94-3" is the requirement that firms disclose the nature and amounts of the material components of a restructuring charge. The objective of this paper is to assess whether these components provide information to financial statement users beyond that contained in the aggregate charge. The evidence is consistent with the decomposition of the charge providing incremental information that would be lost if only the aggregate number is reported. The results also appear to suggest that analysts interpret restructurings as bad news and that inventory writedowns and employee terminations are interpreted as the most negative restructuring components. Copyright Blackwell Publishers Ltd 2002.

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“…Another reason could be that a firm's allocation of resources across HRM activity areas affects the firm's performance in the sales market only in the future (e.g., Edmans, ). Investor perceptions of firm value, by contrast, have a near‐term impact on the firm's performance in the stock market and, hence, on incentive pay outcomes of managers with stock‐based compensation (Mest & Plummer, ). Given that managers have a tendency to discount future outcomes excessively (Miller, ), they may knowingly take actions to boost near‐term results at the expense of future results (Aghion & Stein, ).…”

Section: Characteristics Of Sustainable Hr‐related Signalsmentioning

confidence: 99%