Voluntary Capex Guidance and Capital Investment Efficiency

An Empirical Analysis of Analysts' Capital Expenditure Forecasts: Evidence from Corporate Investment Efficiency*

“…For both groups, INVEST_INEFF is negatively and significantly correlated with both the existence of analyst capex forecasts ( CPXAF ) and the number of analyst capex forecasts ( N_CPXAF ), lending support to our conjecture that firms with capex forecasts exhibit more efficient investment. In addition, INVEST_INEFF is negatively and significantly correlated with the existence of capex guidance ( CPXGD ), which is consistent with the finding from Bae et al (2018) that managerial commitment to capex guidance issuance enhances investment efficiency. Lastly, consistent with prior studies (Derrien and Kecskes 2013; Chen et al 2015), INVEST_INEFF is negatively and significantly correlated with the existence of analyst earnings forecasts ( EPSAF ), suggesting that analysts' EPS forecasts contain information that mitigates investment inefficiency.…”

“…He finds that analysts revise their capex forecasts after the firm issues capex guidance and that the direction and magnitude of the analyst capex revisions are associated with those of the capex guidance surprise. Relatedly, Bae et al (2018) examine whether analyst feedback to voluntary capex guidance enhances the efficiency of the firm's investment expenditures. They focus on how management capex guidance can increase investment efficiency as well as firm value and analyze the role of analysts' capex forecasts only in the context of providing feedback to managers' capex decisions.…”

“…We examine whether and how analyst capex forecasts affect investment efficiency by estimating the following panel regression separately for the under‐ and overinvestment subsamples: where INVEST _ INEFF i , t captures investment (in)efficiency, which is the absolute value of the residuals from estimating the investment model as described in the section “Investment efficiency.” 8 N _ CPXAF i , t is the natural logarithm of the number of analyst capex forecasts issued over the three‐month period extending through the first quarter of the forecast target year. CONTROL i , t −1 represents a vector of variables that control for (i) various firm characteristics previously found to affect investment efficiency (Bae et al 2018; Biddle et al 2009; Chen et al 2013), namely, the issuance of capex guidance ( CPXGD ), which is an indicator variable that equals one if a firm issues management capex forecasts over the same horizon as that over which N_CPXAF is calculated, the existence of analyst earnings forecasts ( EPSAF ), financial reporting quality ( FRQ ), which is measured as accruals quality based on the modified Dechow and Dichev (2002) model; (ii) basic firm characteristics, including market‐to‐book ratio ( M/B ), firm age ( AGE ), institutional ownership ( IO ), firm's operating cycle ( OPCYCLE ), asset tangibility ( TANGIBILITY ), bankruptcy risk ( Z_SCORE ), cash flow from operations divided by sales ( CFOSALE ), whether the firm has reported negative earnings ( LOSS ), leverage ( LEV ) and financial slack ( SLACK ); and (iii) uncertainty of firms' operating environment, including cash flow volatility ( CFOVOL ), sales volatility ( SALESVOL ), and investment volatility ( INVESTVOL ). Detailed variable definitions are provided in the Appendix.…”

“…A concurrent study by Bae et al (2018) shows that managers' voluntary capex guidance has a positive effect on investment efficiency and firm value, and that this effect stems in part from the feedback effect of analysts' capex forecasts issued in response to managers' capex guidance. Our study differs in that we focus on the information content of analysts' capex forecasts and examine their direct effect on investment efficiency as well as the underlying mechanisms.…”

Refinancing Risk and Disclosure of Corporate Investment

“…Among studies that examine capital expenditure forecasts, Lu and Tucker (2012) find that some firms provide more capital expenditure forecasts in response to earnings decline, suggesting a substitution role between earnings and capital expenditure forecasts. Bae et al (2017) show that managers learn from analyst feedback when providing capital expenditure forecasts, which enhances capital investment efficiency. Ali et al (2018) find that capital expenditure forecasts can mitigate the agency conflicts between lenders and borrowers because the forecasts have commitment value.…”