The Role of Analysts’ Cash Flow Forecasts in the Decline of the Accruals Anomaly by

The accruals anomaly, demonstrated by Sloan (1996), generated significant excess returns consistently for over four decades until 2002. Since then, the accruals anomaly has apparently disappeared. In this paper, I argue that one factor responsible for this decline is the increasing incidence of analysts’ cash flow forecasts which has provided markets with information about likely future accruals. The negative relationship between accruals and future returns is significantly weaker in the presence of cash flow forecasts. Further, the mitigating effect of cash flow forecasts is greater for cash flow forecasts with more information about future accruals relative to naïve extrapolation of current accruals and for accurate forecasts. The explanation is robust to explanations based on the improved quality of accruals and greater investment in accruals strategies by hedge funds. The results highlight the importance of analysts’ cash flow forecasts in the appropriate valuation of stocks.