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.
| Original language | English |
|---|---|
| Pages (from-to) | 217-240 |
| Number of pages | 24 |
| Journal | Journal of Corporate Finance |
| Volume | 43 |
| DOIs | |
| Publication status | Published - 1 Apr 2017 |
Funding
sThe authors gratefully acknowledge Professor Michael Firth for his great contribution to the earlier versions of this paper, the comments and suggestions of an anonymous reviewer, and conference participants at the 2016 American Accounting Association Annual Meeting. The authors also thank Lin Chen, Wayne Yu, Jin Gao, Sonia Wong, and seminar participants at Lingnan University and the Hong Kong Institute of Business Studies for helpful comments on earlier versions of the paper.
Keywords
- Investment efficiency
- Over-investment
- Under-investment
- analysts' forecast quality