Analysts’ Cash Flow Forecasts and the Cost of Equity Capital

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Abstract

This study examines whether the availability of cash flow forecasts of a firm is associated with its cost of equity capital. I argue that cost of equity capital is lower when analysts issue cash flow forecasts in addition to earnings forecasts for three reasons. First, cash flow forecasts increase firms’ disclosure quality and reduces information risk. Additionally, cash flow forecasts increase earnings forecasts accuracy, which serves as an important monitor for firms. Finally, analysts implicitly forecast accrual when they forecast cash, which increases the accounting quality of firms, which reduces cost of equity. Consistent with the prediction, I find cost of equity is significantly reduced when analysts issue cash flow forecasts in companion with analysts’ earnings forecasts. This study shows an additional benefit of analysts’ cash flow forecasts.

Author

• Mengyu Ma, Florida International University