The Role Of Earnings Quality In Financial Analyst Forecast Accuracyใ
This study investigates the impact that the quality of reported earnings has on the accuracy of
financial analysts’ earnings forecasts. Extant research indicates that earnings attributes are
important considerations to users of accounting information. One such attribute is earnings
quality; often measured as the magnitude of accruals that do not convert to cash in a timely
manner, where a poor match of cash flows and accruals indicates low earnings quality. Such
accruals could reduce the usefulness of financial reports. This study uses two measurements of
forecast accuracy to assess the impact that earnings quality has on the forecast accuracy of
financial analysts. Following prior research, one measurement considers the environment in
which the analyst operates and compares their accuracy to that of their peers. The second
compares the individual analyst forecast to the actual reported earnings. For both measurements
of accuracy the results show that higher earnings quality is associated with improved forecast
accuracy.