Do Analysts’ Cash Flow Forecasts Encourage Managers to Enhance Real Cash Flows? Evidence from Tax Planning

47 Pages Posted: 12 Jan 2013 Last revised: 20 Aug 2013

See all articles by Benjamin C. Ayers

Benjamin C. Ayers

University of Georgia

Andrew C. Call

Arizona State University (ASU) - School of Accountancy

Casey M. Schwab

University of North Texas

Multiple version iconThere are 2 versions of this paper

Date Written: August 19, 2013

Abstract

Recent research finds that analysts' cash flow forecasts have meaningful financial reporting ramifications, but to date, the identified effects are unlikely to yield meaningful cash flow benefits. This study examines whether analysts' cash flow forecasts encourage managers to enhance the firm's cash flow position through tax avoidance activities. We evaluate the change in cash tax avoidance after analysts begin issuing cash flow forecasts relative to a propensity-score matched control sample without cash flow forecasts. Consistent with analysts' cash flow forecasts encouraging tax avoidance that enhances real cash flows, we find a negative association between cash effective tax rates and analysts' cash flow coverage. Additional analysis suggests this association is driven both by strategies to permanently avoid and to defer tax payments, and that increased cash tax avoidance activity represents a significant component of the overall increase in reported operating cash flows after the initiation of analysts' cash flow coverage.

Keywords: cash flow forecasts, tax planning

JEL Classification: M40, M41, M49, H25, H26

Suggested Citation

Ayers, Benjamin C. and Call, Andrew C. and Schwab, Casey M., Do Analysts’ Cash Flow Forecasts Encourage Managers to Enhance Real Cash Flows? Evidence from Tax Planning (August 19, 2013). Available at SSRN: https://ssrn.com/abstract=2199623 or http://dx.doi.org/10.2139/ssrn.2199623

Benjamin C. Ayers

University of Georgia ( email )

706-542-3772 (Phone)
706-542-3630 (Fax)

Andrew C. Call

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Casey M. Schwab (Contact Author)

University of North Texas ( email )

1155 Union Circle #305340
Denton, TX 76203
United States

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