The role of financial analysts in stock market efficiency with respect to annual earnings and its cash and accrual components

This study examines biases in stock prices and financial analysts' earnings forecasts. These biases take the form of systematic overweighting or underweighting of the persistence characteristics of cash versus accrual earnings components. Our evidence suggests that stock prices tend to overweight and financial analysts tend to underweight these persistence characteristics. Furthermore, we find that analysts' underweighting attenuates stock price overweighting. However, we find little evidence that the overweighting in stock prices attenuates analyst underweighting. This study brings a new perspective to the literature regarding the disciplining role of financial analysts in capital markets.