Management Forecasts and Investment Efficiency: Evidence from a Natural Experiment

This study examines the effect of management forecasts on investment efficiency by exploiting a regulatory change that provides plausibly exogenous variation in the presence of forecast disclosure. A Canadian security issuer that produces minerals and metals had to provide forecasts in technical reports, but, in 2011, firms with gross revenues above certain thresholds were exempted from this requirement. We find that disclosure exemption increases the sensitivity of investment to Tobin’s q, indicating that the original forecast requirement impairs investment efficiency. Additional evidence suggests that this effect likely arises from forecast exemptions enhancing managerial learning from stock prices, mitigating short-termism, and reducing competitive pressure.