Journal Article

Management Forecast Quality and Capital Investment Decisions

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

2014

Overview

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.

• Publisher: American Accounting Association
• Subject: Analytical forecasting / Budgets / Capital / Capital budgeting / Capital expenditure / Capital expenditures / Capital investments / Cash flow forecasting / Decision analysis / Decisions / Divestiture / Earnings / Earnings forecasting / Expenditures / Financial management / Firm budgets / Forecasting / Forecasts / Intuition / Investment / Investment advisors / Investment decision / Investment decisions / Investment strategies / Investments / Managerial skills / Managers / Quality / Stakeholder / Statistical forecasts / Studies / Target acquisitions