Are Analysts’ Cash Flow Forecasts Associated with Improved Earnings Quality? Australian Evidence

We investigate the extent to which the provision by sell side analysts of cash flow forecasts incremental to earnings forecasts has an impact on the quality of Australian firms' financial reporting. Using three separate and distinct indicators of earnings quality, we consistently fail to find evidence of any improvement in the quality of financial reporting following analysts' provision of cash flow forecasts. There is some evidence that the impact on earnings quality is driven by the proportion of mining firms on the Australian Securities Exchange. Our results contrast with the argument by Healy and Palepu (2001) that sell side analysts play an important role in monitoring the quality of financial reporting but are consistent with the claim that sell side analysts' cash flow forecasts lack sophistication (Givoly et al., 2009).