The Effect of Unexpected Earnings Components on Security Analysts’ Earnings Forecasts

Abstract

Using a sample of U.S. security analysts' annual earnings forecasts issued for the publicly traded U.S. firms that have both earnings and cash flow forecasts over the period 2001-2010, we examine how unexpected earnings components affect security analysts' earnings forecast performance. In this study, we find that the unexpected accrual affects negatively analysts' earnings forecast accuracy. However, the unexpected cash flow level improves analysts' earnings forecast accuracy. In addition, we investigate the association between the components of earnings and abnormal stock returns. We find that both components of earnings surprise are useful in assessing firm value, similarly but conversely.