Analysts’ cash flow forecasts and the underreaction to earnings forecast revisions

We examine how cash flow forecasts affect the market reaction to analysts' earnings forecast revisions and, in particular, the post-earnings forecast revision drift. We find that the initial market reaction to earnings forecast revisions is stronger when cash flow forecasts are available. The magnitude of the stock price drift following earnings forecast revisions, measured three months after the earnings forecast revision, is substantially mitigated when cash flow forecasts are available. Our findings are consistent with the view that cash flow forecasts provide useful information to investors that reduces information uncertainty and facilitates the processing of earnings news embedded in analysts' earnings forecast revisions. Our findings extend prior research on the post-earnings forecast revision drift and contribute to prior research on the usefulness of cash flow forecasts.