The list of analyst research outputs has been expanding over the past decades, and one prominent analyst research output that has become increasingly important is capital expenditure (capex) forecasts. Yet we know little about the effects of capex forecasts, in particular, whether the information conveyed in capex forecasts is useful to investors, and more importantly, whether such information affects corporate investment efficiency. This research sheds light on these questions by examining whether analyst capex forecasts affect corporate investment efficiency by serving as an informative signal about the quality of the firm’s investment.

To address these questions, this research uses a sample of 15,677 firm-year observations for 2,558 U.S. firms over the period 2008 to 2017. Consistent with prediction, it is observed that the presence of analyst capex forecasts is associated with a reduction in both under- and overinvestment. This suggests that analyst capex forecasts have an incremental effect on corporate investment efficiency. In other words, it can be concluded that firms with analyst capex forecasts exhibit higher investment efficiency.

To understand the effect of analyst capex forecasts better, two additional tests are conducted. First, this study utilizes the forecasting analyst’s ability to proxy for information quality and finds that the effect of capex forecasts on corporate investment efficiency is substantially stronger when such forecasts are issued by analysts with higher ability or greater industry knowledge. This finding is significant as it suggests that high-ability analysts provide informative forecasts that are incrementally useful to managers and investors, giving us another perspective to examine capex forecast effects. The second test concerns whether the effect of capex forecasts is affected by the nature of signal they convey. The research examines whether capex forecasts are more effective in reducing underinvestment (overinvestment) when the forecast conveys a positive (negative) signal about the firm’s future growth opportunities. It is observed that while positive-growth signals are more effective in reducing underinvestment, negative-growth signals are more effective in reducing overinvestment. These findings are consistent with the view that analysts’ capex forecasts affect capital investment efficiency by conveying information of incremental value that can impact managers’ and investors’ perceptions about firms’ growth opportunities.

Cross-sectional tests are subsequently performed to give more details of how these effects of capex forecasts operate. It suggested that these effects operate at least in part through both a financing channel and a monitoring channel. In relation to financing channel, it is observed that analysts’ capex forecasts reduce underinvestment more for firms which are more financially constrained, and such effect is stronger for capex forecasts signaling higher growth opportunities. With respect to the monitoring channel, analysts’ capex forecasts reduce overinvestment more for firms with higher agency costs, but only for capex forecasts that signal lower growth opportunities.

This study makes significant contributions to literature and actual corporate practice, as it reinforces the significance of provision of analyst capex forecasts. Better utilization of information conveyed in capex forecasts will allow managers and investors to facilitate efficient investment.