How Does Analysts' Forecast Quality Relate to Corporate Investment Efficiency?
2017 · Published in Journal of Corporate Finance 43: 217–240 · DOI 10.1016/j.jcorpfin.2016.12.010
PDF of How Does Analysts' Forecast Quality Relate to Corporate Investment Efficiency?
In one sentence
Higher-quality analyst forecasts are associated with more efficient corporate investment, reducing both under- and over-investment.
Summary
The paper examines how financial analysts affect the efficiency of firms’ investment decisions, using the accuracy and dispersion of analysts’ earnings forecasts as measures of forecast quality. High forecast quality is associated with more investment when a firm is likely to under-invest and less investment when it is likely to over-invest, so forecast quality increases investment efficiency. The effects are stronger for firms with higher information asymmetry and lower institutional ownership. The results are consistent with better analyst forecasts improving the information environment and external monitoring.
Abstract as published
We examine the impact of financial analysts on the efficiency of firms’ investment decisions. We use the accuracy and dispersion of financial analysts’ earnings forecasts as proxies of analyst expertise and quality in making forecasts. We find that high quality forecast is associated with higher investment if the firm is more likely to under-invest and lower investment if the firm is more likely to over-invest, suggesting that forecast quality increases firm-level investment efficiency. We further show that such effects are stronger for the firms with higher information asymmetry and lower institutional stock ownership. The results are consistent with the notion that higher quality of analyst forecasts increases the information environment and external monitoring, which in turn increases investment efficiency.
Citation
Tao Chen, Lingmin Xie, Yuanyuan Zhang (2017). How does analysts' forecast quality relate to corporate investment efficiency?. Journal of Corporate Finance, 43, 217–240. https://doi.org/10.1016/j.jcorpfin.2016.12.010
BibTeX
@article{chen2017analysts,
title = {{How does analysts' forecast quality relate to corporate investment efficiency?}},
author = {Tao Chen and Lingmin Xie and Yuanyuan Zhang},
journal = {Journal of Corporate Finance},
year = {2017},
volume = {43},
pages = {217--240},
doi = {10.1016/j.jcorpfin.2016.12.010}
}