Doctor of Philosophy (PhD)
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Analysts' cash flow forecasts, information asymmetry, cost of equity capital, financing decisions
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Prior research documents mixed results regarding the usefulness of cash flow forecasts. One stream of literature documents analysts provided cash flow information is associated with more accurate earnings forecasts, better accruals quality, stronger market reaction, and more precious information about future valuation. Another stream of literature claims that cash flow forecasts are a simple extension of analysts’ own earnings forecasts and are not useful. I contribute to this debate by examining potential implications of cash flow forecasts for information environment. My dissertation consists of three separate but closely related studies, which investigate how analysts’ cash flow forecasts are linked with information environment, cost of equity capital and firms’ financing decisions.
First, I directly test the association between availability of cash flow forecasts and information asymmetry. Prior studies suggest that analysts provided cash flow information help improve earnings forecasts accuracy and target price forecast accuracy by improving accruals and cash flow information. While those studies indicate positive implications of cash flow forecasts for information environment, none of the prior studies directly test the association between cash flow forecasts and information asymmetry. Using bid-ask spread and shares turnover as proxies, I predict and find firms experience lower information asymmetry after the initial presence of cash flow forecasts. The results imply an additional benefit of cash flow forecasts.
Second, I test if the presence of cash flow forecasts is negatively related with information asymmetry, which in turn, reduces cost of equity capital. Extant research documents negative impact of information asymmetry on cost of equity capital. Using four implied cost of equity measures, I predict and find firms enjoy lower cost of equity capital with the presence of cash flow forecasts.
Third, if the presence of cash flow forecasts is associated with information asymmetry and costs of equity capital, it is also likely to affect financing decisions of firms. I test whether firms having cash forecasts tend to issue new security issuance to raise funds by firms. I also examine whether the availability of cash forecasts are associated with relatively more debt or equity security issuance, which affect capital structure. Empirical results show mixed evidence regarding equity and debt choices. This study provides additional evidence about benefits of having cash flow forecasts. This study should be of interest to investors, analysts and managers.
ma, mengyu, "Analysts’ Cash Flow Forecasts, Information Asymmetry, and Financing Choices of Firms" (2020). FIU Electronic Theses and Dissertations. 4454.
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