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    How Does Analysts' Forecast Quality Relate To Corporate Investment Efficiency?

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    This document discusses how analysts' forecast quality relates to corporate investment efficiency. It presents two hypotheses: 1) That analysts' forecast quality is positively associated with investment efficiency by reducing information asymmetry and acting as monitors of management. 2) That analysts' forecast quality puts pressure on managers, which could lead to short-term behaviors and suboptimal investments. The document provides background on issues like principal-agent conflicts, adverse selection, and the roles of analysts in disseminating information and monitoring firms.

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    How Does Analysts' Forecast Quality Relate To Corporate Investment Efficiency?

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    Thu Thu
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    This document discusses how analysts' forecast quality relates to corporate investment efficiency. It presents two hypotheses: 1) That analysts' forecast quality is positively associated with investment efficiency by reducing information asymmetry and acting as monitors of management. 2) That analysts' forecast quality puts pressure on managers, which could lead to short-term behaviors and suboptimal investments. The document provides background on issues like principal-agent conflicts, adverse selection, and the roles of analysts in disseminating information and monitoring firms.

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    This document discusses how analysts' forecast quality relates to corporate investment efficiency. It presents two hypotheses: 1) That analysts' forecast quality is positively associated with investment efficiency by reducing information asymmetry and acting as monitors of management. 2) That analysts' forecast quality puts pressure on managers, which could lead to short-term behaviors and suboptimal investments. The document provides background on issues like principal-agent conflicts, adverse selection, and the roles of analysts in disseminating information and monitoring firms.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    11 views2 pages

    How Does Analysts' Forecast Quality Relate To Corporate Investment Efficiency?

    Uploaded by

    Thu Thu
    This document discusses how analysts' forecast quality relates to corporate investment efficiency. It presents two hypotheses: 1) That analysts' forecast quality is positively associated with investment efficiency by reducing information asymmetry and acting as monitors of management. 2) That analysts' forecast quality puts pressure on managers, which could lead to short-term behaviors and suboptimal investments. The document provides background on issues like principal-agent conflicts, adverse selection, and the roles of analysts in disseminating information and monitoring firms.

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    © All Rights Reserved
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    How does analysts' forecast quality relate to corporate

    investment efficiency?

    Related literature and hypothesis development

    1.Management incentives, availability of capital, and investment efficiency:


    The reasons for the ineffective investment may be due to the conflict of interest
    between management and shareholders and the main constraints faced by the
    company. The negative impact of moral hazard and the problem of adverse
    selection for the investment efficiency can be reduced by improving the
    information environment of the company and effective monitoring is done by
    shareholders, financial institutions and other stakeholders.
    *The adverse selection problem: When the company's insider ownership
    information superiority on the real value of the company and have the incentive
    to release capital is too high or issued capital when the company was
    overvalued. However, with limited information, external capital suppliers can
    be suspicious and respond by increasing the company's external financial costs.
    The problem of adverse selection not only affects equity financing, but also debt
    financing, for which lenders, who possess less information than borrowers, will
    require a higher cost of debt that squeezes out “good borrowers”.
    *The principal-agent conflict or moral hazard problem: most of this is due to the
    difference between managerial incentives and shareholder interests. Instead of
    enriching shareholders, managers have other privacy goals, arrogance and
    inconsistency of managers and thus lead to inefficient investments.

    2. Analyst forecast quality and investment level: Information intermediary and


    monitoring agent review : A timely and transparent information environment
    and an effective monitoring mechanism can help prevent managers from
    making investment decisions that deviate from the optimal level, and that is also
    the function of analysts. There is a large body of literature documenting the
    roles of financial analysts as intermediaries of information between companies
    and investors.
    *Financial analysts have an information advantage by providing both public and
    private information to individuals and institutional investors.
    *Financial analyst forecasts help minimize information asymmetry between
    insiders of the company and external capital suppliers and between managers
    and shareholders.
    *Expert analysis from external analysts is expected to play a monitoring role
    that helps to increase the investment efficiency of firms by constraining
    management from making suboptimal investments and reducing firms' cost of
    capital.
    Based on the above views, we hypothesize that, analyst forecasts provide
    valuable information on and monitor firms' investment activities, leading to
    higher investment efficiency of firms. Specifically, we expect that the quality of
    analyst earnings forecasts help to reduce over- and under-investment by firms
    and we form the following hypothesis:
    +analysts' forecast quality is positively associated with investment efficiency
    +analysts' forecast quality is negatively associated with investment efficiency.

    3. Analyst forecast quality and investment level: market pressure view


    When stock prices fall and do not meet market expectations, the managers of
    these companies experience reduced compensation, , a greater likelihood of
    turnover and loss of reputation. Therefore, analysts are expected to put pressure
    on regulators or defeat income standards, which could give rise to adverse
    effects such as short-termism and behavior opportunity

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