Management Forecast Quality and Capital Investment Decisions
50 Pages Posted: 27 Jul 2013 Last revised: 22 Jan 2014
Date Written: June 18, 2013
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