AAA Spark Meeting of the Regions

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Foreign Direct Investments and Earnings Forecast Accuracy

Fri, June 2, 11:00am to 12:00pm, Virtual, TBA

Abstract

We investigate the relationship between Foreign Direct Investment (FDI) and the
characteristics of earnings forecasts made by both managers and financial analysts. We find that
both management earnings forecasts (MEFs) and analyst earnings forecasts (AEFs) made after a
larger number of FDI projects undertaken by a firm are less accurate. We also find that this
negative relationship is partially mitigated by the firm’s managerial ability. This suggests that
FDI projects introduce uncertainty about a firm’s earnings not just to external market
participants, but also to the firm’s management. Additional analyses suggest that the negative
relationship between FDI forecast accuracy may extend over multiple years. We document that
FDI projects are also associated with lower precision MEFs, higher frequency of MEF revisions,
and higher dispersion of AEFs. Overall, our results suggest that FDI is an important factor in a
firm’s information environment and FDI disclosure may be useful to facilitate the decision-
making of market participants.

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