How Does Analysts' Forecast Quality Relate to Corporate Investment Efficiency

Posted: 5 Dec 2018

See all articles by Tao Chen

Tao Chen

Nanyang Technological University (NTU) - Division of Banking & Finance

Lingmin Xie

Shenzhen University

Yuanyuan Zhang

Sun Yat-Sen University (SYSU) - Lingnan (University) College; Lancaster University - Department of Accounting and Finance

Date Written: April 12, 2017

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.

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

JEL Classification: G24, G31

Suggested Citation

Chen, Tao and Xie, Lingmin and Zhang, Yuanyuan, How Does Analysts' Forecast Quality Relate to Corporate Investment Efficiency (April 12, 2017). Journal of Corporate Finance, Vol. 43, 2017, Available at SSRN: https://ssrn.com/abstract=3282813

Tao Chen

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

S3-B1A-08, Nanyang Avenue
Singapore, 639798
Singapore

Lingmin Xie (Contact Author)

Shenzhen University ( email )

3688 Nanhai Road, Nanshan District
Shenzhen, Guangdong 518060
China

Yuanyuan Zhang

Sun Yat-Sen University (SYSU) - Lingnan (University) College ( email )

Hong Kong

Lancaster University - Department of Accounting and Finance ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

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