Management Forecast Quality and Capital Investment Decisions

By Theodore H. Goodman, Monica Neamtiu, Nemit Shroff, Halbert White. 2014

350 citations recorded by the source corpus.

ABSTRACT: Corporate investment decisions require managers to forecast expected future cash flows from potential investments. Although these forecasts are a critical component of successful investing, they are not directly observable by external stakeholders. In this study, we investigate whether the quality of managers' externally reported earnings forecasts can be used to infer the quality of their corporate investment decisions. Relying on the intuition that managers draw on similar skills when generating external earnings forecasts and internal payoff forecasts for their investment decisions, we predict that managers with higher quality external earnings forecasts make better investment decisions. Consistent with our prediction, we find that forecasting quality is positively associated with the quality of both acquisition and capital expenditure decisions. Our evidence suggests that externally observed forecasting quality can be used to infer the quality of capital budgeting decisions within firms. JEL...

Subfields: Accounting, Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/a1486aed73f4a7ba176ad50ded25d1c5ec86b3c0

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Citations in the corpus

Common Auditors in M&A Transactions (2016, methodology): “help match acquirers with targets, advise acquirers on target valuation, and/or counsel firms in negotiating the deal price and structure (Goodman et al. 2014).”
The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research (2015, background): “…early stages, but there are a number of studies suggesting that better reporting is associated with higher investment efficiency (e.g., Bens and Monahan, 2004; Biddle and Hilary, 2006; Bushman et al., 2006; Biddle et al., 2009, Badertscher et al., 2013, Cheng et al., 2013; Goodman et al., 2014).”
The Effect of Accounting Conservatism on Corporate Investment during the Global Financial Crisis: THE EFFECT OF ACCOUNTING CONSERVATISM (2016, positive): “Prior studies (e.g., Biddle and Hilary 2006; Biddle et al. 2009; Badertscher et al. 2013; Francis and Martin 2010; Goodman et al. 2014; Shroff 2014; Shroff et al. 2014) provide evidence that financial reporting affects investment efficiency.”
Externalities of Public Firm Presence: Evidence from Private Firms’ Investment Decisions (2013, neutral): “forecasts (Beyer et al., 2010; Goodman et al., 2013) as well as important corporate actions or events, such as product launches (Gu and Li, 2003), capital expenditures (Li, 2010b; Brown et al.”
Corporate investment and changes in GAAP (2016, neutral): “2014), and (3) serving as a signal of managers’ forecasting ability (Goodman et al. 2014).”
Information Environment and the Investment Decisions of Multinational Corporations (2013, background): “when the subsidiary operates in the same industry as the parent (Goodman et al. 2013).”