Management Forecast Quality and Capital Investment Decisions

50 Pages Posted: 27 Jul 2013 Last revised: 22 Jan 2014

Theodore H. Goodman

Purdue University - Department of Accounting

Monica Neamtiu

City University of New York (CUNY) - Stan Ross Department of Accountancy

Nemit Shroff

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Hal D. White

Penn State University

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

Goodman, Theodore H. and Neamtiu, Monica and Shroff, Nemit and White, Hal D., Management Forecast Quality and Capital Investment Decisions (June 18, 2013). The Accounting Review, Vol. 89, No. 1, pp. 331-365, January 2014. Available at SSRN: https://ssrn.com/abstract=2298803

Theodore H. Goodman

Purdue University - Department of Accounting ( email )

Krannert School of Management
West Lafayette, IN 47907-1310
United States

Monica Neamtiu

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Nemit Shroff

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main St.
E62-679
Cambridge, MA MA 02142
United States
6173240805 (Phone)

HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=51407&co_list=F

Hal D. White (Contact Author)

Penn State University ( email )

210 Business Building
Smeal College of Business
University Park, PA 16802-3306
United States
814-863-7055 (Phone)

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