Title

How does analysts' forecast quality relate to corporate investment efficiency?

Document Type

Journal article

Source Publication

Journal of Corporate Finance

Publication Date

4-2017

Volume

43

First Page

217

Last Page

240

Publisher

Elsevier BV

Keywords

Investment efficiency, Over-investment, Under-investment, analysts' forecast quality

Abstract

We examine the impact of financial analysts on the efficiency of firms' investment decisions. We use the accuracy and dispersion of financial analysts' earnings forecasts as proxies of analyst expertise and quality in making forecasts. We find that high quality forecast is associated with higher investment if the firm is more likely to under-invest and lower investment if the firm is more likely to over-invest, suggesting that forecast quality increases firm-level investment efficiency. We further show that such effects are stronger for the firms with higher information asymmetry and lower institutional stock ownership. The results are consistent with the notion that higher quality of analyst forecasts increases the information environment and external monitoring, which in turn increases investment efficiency.

DOI

10.1016/j.jcorpfin.2016.12.010

Print ISSN

09291199

E-ISSN

18726313

Publisher Statement

Copyright © 2017 Elsevier B.V. Access to external full text or publisher's version may require subscription.

Full-text Version

Publisher’s Version

Recommended Citation

Chen, T., Xie, L. & Zhang, Y. (2017). How does analysts' forecast quality relate to corporate investment efficiency? Journal of Corporate Finance, 43, 217-240. doi: 10.1016/j.jcorpfin.2016.12.010