The Value of Analysts' Capital Expenditure Forecasts

Financial analysts are important information intermediaries in capital markets. Traditional research outputs of analysts, such as buy/sell recommendations and EPS forecasts, have been the mainstream focus of market participants. In recent years, analyst forecasts of capital expenditures (capex) have become increasingly prevalent—roughly 70 percent of the US public companies with EPS forecasts have capex forecasts issued by analysts. Yet, little is known about what information is conveyed in capex forecasts and whether these forecasts create value for companies being covered.

We show that analysts’ capex forecasts are used by market participants to evaluate companies’ future growth opportunities. More importantly, companies with analyst capex forecasts exhibit higher investment efficiency in fixed asset. Analysts’ capex forecasts can reduce underinvestment when such forecast signals high future growth and reduce overinvestment when they signal low future growth. This effect operates at least through two distinct channels—a financing channel that mitigates underinvestment associated with insufficient financial resources and a monitoring channel that mitigates overinvestment associated with agency problems.

Our evidence suggests that capex forecasts serve as a signal to both internal managers and external investors about the quality of the company’s investment. By providing capex forecasts, analysts play both information and disciplinary roles in the context of managers’ investment decisions. In short, analyst capex forecasts can affect the real economy in the case of corporate investment.


Assistant Professor