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
Language
English
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