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Management forecast errors and corporate investment efficiency

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  • Huang, Kelly

Abstract

This paper examines the relation between management forecast errors and corporate investment efficiency. If managers’ forecasting biases systematically affect both external earnings forecasts and internal investment project payoff forecasts, errors in management earnings forecasts will be linked to corporate investment decisions. Consistent with this conjecture, I find that signed management forecast errors are associated with abnormal investment; specifically, more optimistic forecasts are associated with more over-investment, while more pessimistic forecasts are associated with more under-investment. Furthermore, I find that the link between forecast errors and abnormal investment is stronger when analyst feedback reinforces managers’ forecast errors and when managers display persistent forecast errors. Additional tests that consider managers’ disclosure incentives reveal that the link between forecast errors and abnormal investment is stronger when forecast errors are less likely driven by managers’ intentional distortions.

Suggested Citation

  • Huang, Kelly, 2020. "Management forecast errors and corporate investment efficiency," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(3).
    • Handle: RePEc:eee:jocaae:v:16:y:2020:i:3:s1815566919300827
    DOI: 10.1016/j.jcae.2020.100208
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    More about this item

    Keywords

    Management earnings forecasts; Managerial bias; Investment efficiency;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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