Management Forecast Quality and Capital Investment Decisions
50 Pages Posted: 27 Jul 2013 Last revised: 22 Jan 2014
Date Written: June 18, 2013
Abstract
Corporate investment decisions require managers to forecast expected future cash flows from potential investments. Although these forecasts are a critical component of successful investing, they are not directly observable by external stakeholders. In this study, we investigate whether the quality of managers’ externally reported earnings forecasts can be used to infer the quality of their corporate investment decisions. Relying on the intuition that managers draw on similar skills when generating external earnings forecasts and internal payoff forecasts for their investment decisions, we predict that managers with higher quality external earnings forecasts make better investment decisions. Consistent with our prediction, we find that forecasting quality is positively associated with the quality of both acquisition and capital expenditure decisions. Our evidence suggests that externally observed forecasting quality can be used to infer the quality of capital budgeting decisions within firms.
Keywords: management earnings forecasts, voluntary disclosure, capital expenditure, investment, capital budgeting, managerial ability, forecasting ability
JEL Classification: D83, G31, M41
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
CEO Turnover after Acquisitions: Are Bad Bidders Fired?
By Kenneth Lehn and Mengxin Zhao
-
Does the Midpoint of Range Earnings Forecasts Represent Managers’ Expectations?
By Will Ciconte, Marcus Kirk, ...
-
Methods of Valuation for Mergers and Acquisitions
By Michael J. Schill, Susan Chaplinsky, ...