Further evidence on the importance of analysts' cash flow forecasts

Analysts? cash flow (CPS) forecasts have been the topic of much recent research. While some prior research (for example, Givoly et al., 2009) suggests that these forecasts have very limited usefulness, Call et al. (2012) find evidence to the contrary. We take this body of research forward and find that CPS forecasts improve the firm?s information environment by reducing the information asymmetry, as evidenced by lower post-earnings announcement drift and bid-ask spread around the earnings announcement. We also examine the usefulness of CPS forecasts as a source of value-relevant information and construct a composite earnings forecast, based on the EPS forecast and the CPS forecast. We find a significant market reaction to the composite forecast error, controlling for the EPS forecast error. Finally, we show that the composite forecast performs better than the EPS forecast in capturing the market?s expectations under some situations.