The Halo Effect of Cash Holdings in COVID-19 and Accuracy of Analysts’ Earnings Forecast

Abstract

Purpose: This study investigates the halo effect of corporate cash holdings during the COVID-19 pandemic on the accuracy of analysts' earnings forecasts. Methodology: This study uses a sample of A-share listed companies from the Shanghai and Shenzhen stock exchanges in China between 2018 and 2022. We employ a continuous difference-in-differences (DID) approach, with the pre- and post-pandemic periods serving as the time variable and the cash holdings at the end of 2018 used as the categorical variable. Results: The findings indicate that firms with higher pre-pandemic cash holdings tend to receive more optimistic earnings forecasts from analysts, leading to lower forecast accuracy. Further analysis reveals that analysts disproportionately overestimate the precautionary value of cash reserves in firms characterized by higher financing constraints, lower agency costs, and greater forecast dispersion. This excessive optimism toward cash-rich firms significantly undermines the precision of earnings forecasts. Suggestions: The results suggest that corporate cash holdings exhibit a halo effect during emergencies. Analysts should maintain professional objectivity and prudence when forecasting future earnings, ensuring a rational and unbiased forecast.