Are Analyst Free Cash Flow Forecasts Valuable? Evidence from Target Price Changes

We examine the value of analyst Free Cash Flow (FCF) forecasts in the context of target price changes. We argue that investors can use FCF forecasts to distinguish between FCF based target price changes and less informative target price changes primarily driven by discount rate, long term growth rate and unpublished FCF forecast changes (NON FCF changes). We show empirically that FCF based target price changes have on average 27-54% stronger initial price reactions than NON FCF based target price changes. We find that this differential price reaction is not driven by analyst reputational concerns but by analysts signalling their conviction on the company's future fundamentals. Specifically, the analyst decision to issue a FCF based target price is related to momentum, to company earnings exceeding consensus forecast and to the company recently having announced earnings results. Further, we find that a long-short portfolio strategy that trades only on FCF based target price changes earns higher average abnormal returns of 87 basis points for the three day initial event period, compared to a portfolio that trades on all target price changes