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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Advances in Accounting, Volume 27, Issue 2, December 2011, Pages 242–255
Extant literature provides conflicting results with respect to the usefulness and accuracy of analysts' operating cash flow forecasts. Our study empirically examines the importance and influence of meeting or beating analysts' operating cash flow forecasts on a firm's cost of debt. Results indicate that firms meeting/beating analysts' cash flow forecasts have higher initial bond ratings as well as lower initial bond yields. Additionally, based upon an analysis of rating changes, firms meeting or beating cash flow forecasts have a higher probability of receiving a debt rating upgrade and a lower probability of a ratings downgrade compared to firms missing cash flow forecasts. A direct comparison of the importance of meeting/beating cash flow versus earnings benchmarks indicates that debt market participants appear to incrementally value both types of forecasts, and contrary to selected equity market findings, neither forecast subsumes the other for debt market participants.
The demand for detailed cash flow information and cash flow forecasts increased substantially following the accounting scandals identified in the early 2000's.1 These scandals eroded investor confidence in the capital markets and made it clear that earnings alone do not always predict future firm performance consistently and/or reliably (Jain & Rezaee, 2006). Under certain economic circumstances, firms have incentives to use the inherent flexibility in generally accepted accounting principles to help present a favorable earnings position. In many circumstances cash flow information is arguably viewed as being more concrete and less susceptible to artificial manipulations than “pro-forma” or actual reported accounting earnings.2 Our research examines the incremental benefits to a firm's cost of debt by meeting analysts' cash flow forecasts. The usefulness and accuracy of cash flow forecasts incremental to earnings forecasts remains an unresolved issue in extant literature. Givoly, Hayn, and Lehavy (2009) conclude that analysts' cash flow forecasts are less accurate and of lower quality than analysts' earnings forecasts. Their findings directly call into question the incremental usefulness of cash flow forecasts to capital market participants. In contrast, McInnis and Collins, 2011 and Call et al., 2009 find that cash flow forecasts provide useful information incremental to earnings forecasts. Moreover, these cash flow forecasts can also serve as a disciplining mechanism to managers' financial reporting behavior when combined with earnings forecasts because of the implicit information contained about accruals. Our research adds additional evidence to the debate by examining debt market participants' perceptions of the usefulness of cash flow forecasts. Specifically, we empirically examine the effect of meeting or beating cash flow3 forecasts on three important measures of the firm's borrowing costs. First, we examine the effects of meeting/beating cash flow benchmarks on initial bond ratings. Bond ratings are assigned by a team of rating analysts before a new issue is sent to market and serve as an important indicator of a firm's default risk. Higher ratings typically translate into lower bond yields. Second, we directly investigate yield effects related to meeting/beating cash flow forecasts by examining the marketplace pricing of a firm's new debt issuance. Third, we investigate the effect of meeting/beating cash flow forecasts on the probability of receiving a bond rating upgrade or downgrade. As we undertake each of these analyses, we also conduct a direct comparison regarding the importance of meeting/beating analysts' cash flow forecasts compared to meeting/beating analysts' earnings forecasts. Our results confirm our expectations that meeting or beating analysts' cash flow forecasts has positive implications for a firm's cost of debt. We find evidence that firms that meet or beat their cash flow forecasts have higher initial bond ratings and lower initial bond yields (approximately a 22 basis points differential). Additionally, we find evidence that firms meeting or beating cash flow forecasts have a higher probability of a rating upgrade while firms missing the benchmark have a higher probability of a rating downgrade. Further, for firms missing the benchmark, the probability of a downgrade is approximately twice as large as the probability of an upgrade for firms achieving the benchmark. This asymmetric reaction is consistent with Easton, Monahan, and Vasvari's (2009) assessment that bonds are far more sensitive to bad news than good news. Finally, while we are able to establish that both the cash flow and the earnings benchmarks each provide incremental information to debt market participants, we are unable to clearly document that one is statistically more important than the other with respect to a firm's cost of debt. Our research contributes to the existing literature in at least two ways. First, we provide empirical evidence regarding the importance of meeting or beating analysts' cash flow forecasts on a firm's cost of debt. Second, in contrast to selected research conducted in the equity markets that questions the importance and accuracy of cash flow forecasts Givoly et al. (2009), we provide evidence consistent with various constituents in debt markets utilizing cash flow forecasts to help assess the default risk of a firm's debt. In this regard, our results are consistent with the findings of McInnis and Collins, 2011 and Call et al., 2009 which indicate analysts' cash flow forecasts provide incremental information to the equity markets beyond that contained in earnings forecasts. Overall, the results of our study should contribute to the debate regarding the usefulness of analysts' cash flow forecasts, and also help to clarify the importance of meeting cash flow expectations to all those interested in the determinants of a firm's cost of debt. The remainder of this paper is organized as follows. Section 2 provides relevant background information and reviews the related research. Section 3 develops the hypothesis while Section 4 describes the research design utilized to test our hypothesis. Section 5 describes the sample selection process. Results are presented in Section 6 and sensitivity analysis is reported in Section 7. Finally, Section 8 provides a summary and conclusions overview.
نتیجه گیری انگلیسی
Our research examines the importance of meeting or beating analysts' cash flow forecasts on a firm's cost of debt by utilizing three important metrics: 1) initial bond rating, 2) bond yield, and 3) changes in ratings. Each of these metrics is determined by a separate market process, or the timing is initiated by a different market constituent. Some recent research conducted in the equity arena has questioned the quality and usefulness of overall cash flow forecasts (Givoly et al., 2009), but has called for additional investigation into certain subsets of firms. Our research adds to the existing literature by investigating the effects of cash flow benchmarks in the bond arena. Our findings are consistent with McInnis and Collins, 2011 and Call et al., 2009 who provide evidence that analysts' cash flow forecasts do provide valuable information to stakeholders in the capital markets. We provide evidence that firms meeting or beating their cash flow forecasts exhibit higher initial ratings and lower initial bond yields. Furthermore, we also document that firms meeting or beating (missing) cash flow forecasts have a higher probability of receiving a bond rating upgrade (downgrade). While we find that each benchmark provides incrementally different and important information, we are unable to provide support for the hypothesis that bond analysts or investors value cash flow forecasts more than earnings forecasts. These results should contribute positively to the debate concerning the usefulness and importance of analysts' cash flow forecasts. We find cash flow forecasts to provide incrementally beneficial information to bond market participants over and above that found in earnings forecasts. In addition, these findings help provide insight with respect to the importance of meeting cash flow benchmarks to all those interested in the determinants of a firm's cost of debt. The findings are consistent with stakeholders in the debt markets considering analysts' cash flow forecasts worthwhile, and that debt market participants utilize cash flow forecasts as incremental and supplemental information to earnings forecasts.