Management Investment Forecast Accuracy and Corporate Investment Efficiency

This study examines whether the quality of management investment forecasts is associated with corporate investment efficiency. The main result finds that firms with more accurate management forecasts about capital expenditure and R¥&D expense make more efficient investments that are closer to the optimal levels after controlling for the self-selection bias for firms' issuance decisions of management investment forecasts. This implies that more accurate management investment forecasts alleviate the problem caused by information asymmetry. The study also investigates whether management investment forecasts mitigate adverse selection or moral hazard. To do so, this study utilises forecasting bias as a factor that lowers the quality of information issued by managements and ownership structure as a factor that captures the degree of monitoring of managements. The results reveal that an association between the accuracy of management investment forecasts and investment efficiency become weak for firms with forecasting bias whereas ownership structure does not have an effect on an association between them. This suggests that management investment forecasts play roles in alleviating adverse selection, not moral hazard. The main results do not depend on the method of estimating corporate investment efficiency or the effects of the global financial crisis in 2008