This study investigates the incorporation of cash flow information in forecastsof earnings made by security analysts. It extends and links two streams ofresearch in accounting. One stream of research has been concerned withrevisions in earnings forecasts made by analysts. What factors lead to forecastrevisions? Prior research has concentrated on investigating revisions of earningsforecasts in response to earnings announcements. A critique of that literaturenotes that there is a lack of knowledge concerning other factors that lead toforecast revisions (Brown, et al., 1985, p. 130). This study extends that researchby identifying accounting measures beyond earnings apparently deemedinformative to analysts when predicting future earnings. The second streamof research has been concerned with the question of whether a decompositionof earnings into cash flow and accrual components provides incrementalinformation beyond that contained in earnings alone.à ¢ Is such a decompositioninformative? Is a dollar of accrual accounting earnings (worth) the same asa dollar of cash flow? Prior research has investigated this question throughanalysis of security returns. Findings have been somewhat contradictory. Thisstudy extends that research by addressing the question of the use of earningscomponent information in the previously unexamined context of the formationof analysts' earnings forecasts. In doing so, the study provides evidence onthe signal conveyed by earnings components as perceived by one major groupof users of accounting information.
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