Management forecast quality and capital investment decisions

Theodore H. Goodman, Monica Neamtiu, Nemit Shroff, Hal D. White

Research output: Contribution to journalArticlepeer-review

81 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)331-365
Number of pages35
JournalAccounting Review
Volume89
Issue number1
DOIs
StatePublished - Jan 2014

Keywords

  • Capital budgeting
  • Capital expenditure
  • Forecasting ability
  • Investment
  • Management earnings forecasts
  • Managerial ability
  • Voluntary disclosure

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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