The Quality of Management Forecasts of Capital Expenditures and Store Openings
39 Pages Posted: 17 Sep 2004
Date Written: September 15, 2004
Abstract
We study the quality of retailers' forecasts of planned capital expenditures and store openings. We examine five desirable attributes of management forecast quality: unbiasedness, efficiency, explanatory power, incremental informativeness, and sufficient-statistic efficiency (meaning that the forecasts summarize all available information). We find forecasts are unbiased, have high explanatory power and have substantial incremental informativeness relative to alternative historical information. In our in sample tests, we find evidence of inefficiency and sufficient statistic inefficiency, but our out of sample tests find no significant evidence of either. That suggests that it is difficult to improve on these management forecasts. Overall the evidence indicates that these forecasts are of high quality. These findings contribute to our understanding of the general quality of MD&A information, management forecasts in general, and the reasons why MD&A disclosures are associated with future accounting results and reduced cost of capital. The findings also provide some support for recent arguments that encourage requiring information on the ex post accuracy of estimates.
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