Analyst Forecasts, Managerial Learning, and Corporate Investments

Abstract

Prior research shows that managers learn from the capital market; however, it remains unclear what specific information that managers seek to learn. Building on prior results that financial analysts have information advantage relative to managers at the macroeconomic level, we show that such information advantage is an important source for what managers learn from analysts in making investment decisions. Specifically, the sensitivity of corporate capital investment to analyst forecasts of firm earnings or long-term growth significantly increases with the exposures of a firm’s operations to macroeconomic factors, especially business cycles. These results are stronger when firms have higher capital intensity and hence stronger incentives to learn, and are robust to direct controls for macroeconomic factors. Overall, our results suggest that managers learn from analysts regarding the implications of macroeconomic factors for firm-specific prospects and incorporate them into their capital investment decisions.

Keywords: capital investment; managerial learning; analyst forecasts; macroeconomic information.

JEL Classification: D83, G31