Improving Investors' Forecast Accuracy when Operating Cash Flows and Accruals Are Differentially Persistent

Hewitt, Max

doi:10.2308/accr.2009.84.6.1913

Cited by 61 publications

(22 citation statements)

References 26 publications

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“…Likewise, investors may not fully understand red flags that can indicate fraud. For example, while Lee et al (1999) illustrate that large accruals are a fraud red flag, Hewitt (2009) finds that both professional analysts and nonprofessional investors fixate on earnings and have trouble separating cash flows from accruals in financial statements.…”

Section: Framework Of Investors' Use Of Red Flagsmentioning

confidence: 98%

Understanding investor perceptions of financial statement fraud and their use of red flags: evidence from the field

et al. 2015

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We surveyed 194 experienced, nonprofessional investors to examine the relations between their perceptions of the frequency of financial reporting fraud, their use of financial statement information, the importance they place on conducting their own fraud risk assessments, and their use of fraud red flags. We find that investors' perceptions of the frequency of fraud and their use of financial statement information positively influence the importance they place on conducting their own fraud risk assessments. Investors who place importance on assessing fraud risk make greater use of fraud red flags to avoid fraudulent investments. Red flags commonly relied upon include SEC investigations, pending litigation, violations of debt covenants, and high management turnover. Investors rely less on company size and age, the need for external financing, and the use of a non-Big 4 auditor. We also find evidence of positive associations between the use of specific red flags and investors' portfolio returns.

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Section: Framework Of Investors' Use Of Red Flagsmentioning

confidence: 98%

Understanding investor perceptions of financial statement fraud and their use of red flags: evidence from the field

et al. 2015

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“…In all four groups, the participants were asked to evaluate the hypothetical company "Beta." Prior research in accounting and psychology indicates that the acquisition of information requires accessing (Hewitt, 2009) and viewing this information (Dilla et al, 2013) and that successful acquisition can be tested by decision makers' ability to recall the content of specific information items (e.g., Hales, Venkataraman, & Wilks, 2012). Thus, we tracked whether the participants accessed the different reports offered to them, and used manipulation checks to assess whether they correctly stored and recalled specific sustainability information in the material, to analyze the acquisition of sustainability information.…”

Section: Designmentioning

confidence: 99%

Integrated Reporting and Assurance of Sustainability Information: An Experimental Study on Professional Investors’ Information Processing

Reimsbach

Hahn

Gürtürk

2017

European Accounting Review

211

199

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Sustainability-related non-financial information is increasingly deemed value relevant. Against this background, two recent trends in non-financial reporting are frequently discussed: integrated reporting and assurance of sustainability information. Using an established framework of information acquisition, evaluation, and weighting, this experimental study investigated how the choice of reporting format interacts with the voluntary assurance of sustainability information. The results from a sample of professional investors underline the important role of assurance in the context of voluntary disclosure and illustrate the relevant interaction with the reporting format. Assurance of sustainability information positively affected professional investors' evaluation of a firm's sustainability performance, resulted in a higher weighting of this information, and led to higher investment-related judgments. However, this assurance effect was weaker in the case of integrated reporting compared to separate reporting. We attribute this effect to a cognitive bias in decision making when assured financial performance and non-assured sustainability performance are presented in the same report.

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“…Using an experiment, Hewitt (2008) finds that when the earnings components are differentially persistent, earnings forecast accuracy is enhanced when participants are required to attend to the individual earnings components. Our study complements and extends Hewitt's (2008) experimental results by providing large sample evidence consistent with Hirshleifer and Teoh's (2003) theoretical prediction. Our paper is also closely related to concurrent papers by Pae et al (2007) and Ertimur et al (2008).…”

Section: Introductionmentioning

confidence: 99%

Are analysts’ earnings forecasts more accurate when accompanied by cash flow forecasts?

2009

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We examine whether analysts' earnings forecasts are more accurate when they also issue cash flow forecasts. We find that (i) analysts' earnings forecasts issued together with cash flow forecasts are more accurate than those not accompanied by cash flow forecasts, and (ii) analysts' earnings forecasts reflect a better understanding of the implications of current earnings for future earnings when they are accompanied by cash flow forecasts. These results are consistent with analysts adopting a more structured and disciplined approach to forecasting earnings when they also issue cash flow forecasts. Finally, we find that more accurate cash flow forecasts decrease the likelihood of analysts being fired, suggesting that cash flow forecast accuracy is relevant to analysts' career outcomes.

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Improving Investors' Forecast Accuracy when Operating Cash Flows and Accruals Are Differentially Persistent

Cited by 61 publications

References 26 publications

Understanding investor perceptions of financial statement fraud and their use of red flags: evidence from the field

Understanding investor perceptions of financial statement fraud and their use of red flags: evidence from the field

Integrated Reporting and Assurance of Sustainability Information: An Experimental Study on Professional Investors’ Information Processing

Are analysts’ earnings forecasts more accurate when accompanied by cash flow forecasts?

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