Revisions of peer firms’ analyst forecasts and corporate investment

Abstract

This study examines whether and how revisions of analyst capital expenditure forecasts of peer firms’ investment affect focal firms’ investment level and efficiency. Analysts revise their forecasts when the new information accumulated since the original forecast warrants such revisions. If revisions of peer firms’ analyst capex forecasts bring new information about industry trends and the macro environment, focal firms, which operate in the same industry, should benefit from this information and incorporate it into their investment decisions. I find that focal firms’ investment level and efficiency are positively related to the analyst forecast revisions of peer firms’ investment. Moreover, these relations vary with firm characteristics such as firm age, levels of information asymmetry, board independence, and industry competition. These findings suggest that revisions of analyst capex forecasts provide valuable insight into industry growth opportunities that can be exploited by other firms in the same industry.