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

Tao CHEN, Lingmin XIE, Yuanyuan, Karen ZHANG

Research output: Journal PublicationsJournal Article (refereed)

7 Citations (Scopus)

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 languageEnglish
Pages (from-to)217-240
Number of pages24
JournalJournal of Corporate Finance
Volume43
DOIs
Publication statusPublished - 1 Apr 2017

Fingerprint

Corporate investment
Investment efficiency
Analysts' forecasts
Financial analysts
Expertise
Investment decision
Firm investment
Analysts
External monitoring
Information environment
Ownership
Analysts' earnings forecasts
Information asymmetry

Keywords

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

Cite this

CHEN, Tao ; XIE, Lingmin ; ZHANG, Yuanyuan, Karen. / How does analysts' forecast quality relate to corporate investment efficiency?. In: Journal of Corporate Finance. 2017 ; Vol. 43. pp. 217-240.
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How does analysts' forecast quality relate to corporate investment efficiency? / CHEN, Tao; XIE, Lingmin; ZHANG, Yuanyuan, Karen.

In: Journal of Corporate Finance, Vol. 43, 01.04.2017, p. 217-240.

Research output: Journal PublicationsJournal Article (refereed)

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N2 - 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.

AB - 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.

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