Investment Efficiency, Forecasting Consistency and Litigation Risk

• In Event: Forecasts and Analysts

Abstract

We examine whether management earnings forecast consistency results in improved investment efficiency. A consistent management forecast refers to one that is predictable in its transformations of realized earnings without random errors. We find that managers issuing consistent forecasts tend to make more efficient capital investment decisions, controlling for the effect of management forecast accuracy. Further investigation reveals that the positive association between management forecast consistency and investment efficiency is more pronounced when firms are exposed to higher ex ante litigation risk. Additional analysis indicates that increased investment efficiency due to management forecast consistency is particularly driven by decreased likelihood of under-investment. Overall, our findings suggest that management forecast consistency signals the efficiency of corporate investment policy.

Authors

• Chen-Lung Chin, National Chengchi University

• Peng-chia Chiu, The Chinese University of Hong Kong

• Yu Po-Hsiang, National Chengchi University