UNDER WHAT CIRCUMSTANCES ARE NEGATIVE EARNINGS SURPRISES PAIRED WITH NONNEGATIVE CASH FLOW SURPRISES?

10.6293/AQAFA.201912_(17).0004

Arianna Spina Pinello；Carlos Jimenez-Angueira

Analyst Cash Flow Forecasts ； Analyst Earnings Forecasts ； Earnings Surprises ； Cash Flow Surprises ； Beating or Missing Forecasts

Advances in Quantitative Analysis of Finance and Accounting

17期（2019 / 12 / 31）

87 - 122

英文

Since cash flows are a component of earnings, nonnegative cash flow surprises help generate nonnegative earnings surprises while negative cash flow surprises help generate negative earnings surprises. Furthermore, managers are incentivized to manage accruals in order to generate nonnegative earnings surprises, and this action has no impact on cash flow surprises. Hence, a cash flow surprise of the same sign as the earnings surprise, or a nonnegative earnings surprise coupled with a negative cash flow surprise are straightforward possible scenarios. On the other hand, the circumstances under which a negative earnings surprise paired with a nonnegative cash flow surprise arises are less intuitive. An investigation of this scenario is important because cash flow surprises impact the weight market participants place on earnings (Brown, Huang, & Pinello, 2013). We investigate factors related to analysts' forecasts and firms' financial condition to shed light on the conditions associated with a nonnegative cash flow surprise when the earnings surprise is negative. We document that the pairing of nonnegative cash flow surprises with negative earnings surprises is more likely when (1) analyst following of cash flows vis-à-vis earnings is large; (2) analysts forecast extreme accruals; (3) analysts downwardly revise cash flow but not earnings forecasts; (4) firms have inflated balance sheets; and (5) firms report decreases in earnings but not in cash flows. Our findings provide insight into firms' earnings and cash flow surprise patterns.

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