The out-of-sample prediction of annual operating cash flow: A comparison of regression and naive forecast models

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This study proposes that a no-change naïve forecast of (operating) cash flow is as accurate as time-series and cross-sectional regression forecasts of cash flow. The study first demonstrates that cross-sectional regression forecasts of cash flow with firm-size controls are as accurate time-series (firm-specific) regression forecasts. Next the study confirms the expectation that a naïve forecast is as accurate as the regression model forecasts. Finally, the study confirms that some studies in the literature misapply Theil’s U-statistic, and overstate the ability of regression forecast models to outperform a naïve forecast model. (RQFA review process requires 3-6 mos per Cabells).

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