The Relation between Earnings Forecast Accuracy and Investment Efficiency

Abstract

Earnings forecast accuracy can affect investment efficiency. We expect that an increase in earnings forecast accuracy will result in an increase in investment efficiency and a decrease in both over-investment and under-investment. The purpose of this study is to examine the relation between management earnings forecast accuracy and investment efficiency. Following the literature, we use the deviation from the expected level of investment considering the growth opportunities, as the measure of investment efficiency. To examine the hypotheses, we identify a sample of 133 firms listed on Tehran Securities and Stock Exchange during the period of 2009-2013.Regression analysis is used to examine the hypotheses and 10 control variables (size, ROA, Tobin’s Q, sales growth, leverage, stock return, forecast horizon, stdev. Stock returns, stdev. ROA and stdev. I) are used in the regression models. Findings suggest that there is a positive relationship between earnings forecast accuracy and investment efficiency and there is a negative relationship between earnings forecast accuracy and over-investment. In case of under-investment the relation is not strong. The results of examining hypotheses indicates that an increase in earnings forecast accuracy results in an increase in investment efficiency and a decrease in over-investment. Regarding the under-investment, no strong relation was found between earnings forecast accuracy an under-investment.

Keywords

• earnings forecast accuracy
• investment efficiency
• over-investment
• under-investment