The effect of the accrual component of earnings volatility on security analysts' target price forecast performance

Abstract

Using a sample of U.S. security analysts' target price forecasts issued over the period 2000-2010, we examine the relation between the accrual component of earnings volatility and security analysts' target price forecast performance. Our study shows that when earnings are smoother or more volatile than cash flows, analysts' target price forecasts are less accurate and have lower possibilities of being met or beaten at some time during or at the end of the forecast horizon. These results are consistent with the fact that the accrual component of earnings volatility has a significant negative impact on analysts' target price performance and suggest that the analysts fail to correctly incorporate the implications of this information into their target price forecasts.