In forecasting future earnings, analysts face uncertainty in understanding the firm’s economic situation, especially if cash is held by foreign subsidiaries – given that it may be subject to investment inefficiencies.

In recent work published in the European Accounting Review, Michele Fabrizi (Department of Economics and Management of the University of Padova), Elisabetta Ipino (Seattle Pacific University), Michel Magnan (John Molson School of Business, Concordia University) and Antonio Parbonetti (Department of Economics and Management of the University of Padova) examine whether foreign cash holdings increase the complexity of analysts’ forecasting tasks, thereby affecting their earnings forecasts’ properties.

Using a sample of U.S. multinational corporations and estimating their foreign cash holdings, the authors show that a firm with an average level of estimated foreign cash to total assets has a 12.5% higher forecast error relative to firms without foreign cash. Moreover, the authors document that estimated foreign cash is negatively associated with future performance and that, in the presence of large amounts of foreign cash, financial analysts issue more optimistic forecasts.

Read the full paper here: https://unipd.link/Paper_Fabrizi_Parbonetti