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Analysts’ Cash Flow Forecasts and Firms’ Information Environment: Evidence from Bid-Ask Spread

Fri, May 13, 3:30 to 4:50pm, Hilton Orlando Lake Buena Vista, Lake Buena Vista (Orlando), Florida, TBA

Abstract

This study investigates whether analysts cash flow forecasts are likely to influence firms’ information environment. Extent literature finds mixed results regarding the usefulness of cash flow forecasts. We posit that analyst earnings forecasts can also exacerbate information asymmetry among investors due to their differential information processing skills. We argue that if analyst cash flow forecasts contain incremental information, the release of cash flow forecasts is likely to mitigate information asymmetry among investors. Using average bid-ask spread as a proxy for information asymmetry, we report that the presence of cash flow forecasts is likely to mitigate information asymmetry. By using a propensity score matched sample, difference-in-differences analyses support our hypothesis that information asymmetry decreases in treatment group after the initiation of cash flow forecasts. This study shows the usefulness of cash flow forecasts in mitigating information asymmetry, a widespread friction in capital markets.

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