Whose Beliefs Matter for Firm Investment?
Firm investment decisions are inherently forward-looking and therefore depend on expectations about the future of the firm. In reality, such expectations vary across firm managers and other market participants. This disagreement raises the question of whose beliefs guide corporate investment. This paper examines the extent to which firm capital investment reflects the beliefs of managers, as opposed to those of outside market participants. Motivated by a standard q-theory framework, I relate firm investment rates to managerial and analyst expectations of future earnings per unit of capital, measured respectively from management earnings guidance announcements and contemporaneous consensus equity analyst forecasts. Although manager beliefs are more accurate predictors of future earnings, firm investment is more responsive to analyst expectations. Both sets of beliefs explain investment beyond traditional marginal q proxies, but the association between investment and managerial expectations is fully absorbed by that with analyst expectations. Shapley value decompositions of the variation in investment rates explained by beliefs confirm that analyst beliefs consistently play a larger role in explaining investment. Yet, the relationships between investment and future operating profitability or valuations do not vary significantly with the relative optimism of managers compared to analysts. Tests of potential mechanisms including CEO incentives, CEO confidence, board oversight, and external financing concerns suggest that they do not account for these patterns. This evidence reveals a new puzzle: firms appear to adjust capital investment to outsider beliefs in ways unexplained by standard incentive, behavioral, or governance channels.
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