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Forecasting Errors in Capital Budgeting: A Multi-Firm Post-Audit Study

2007; Taylor & Francis; Volume: 52; Issue: 1 Linguagem: Inglês

10.1080/00137910601159771

1547-2701

João Oliveira Soares, Maria Cristina Coutinho, Carlos Martins,

Fiscal Policy and Economic Growth

This is a post-audit study concerning the accuracy of capital budgeting procedures. It is based on the statistical analysis of the deviations occurring between effective and forecasted performance of companies after implementing their projected investments. The forecasts were collected from a large database of applications for investment incentives submitted for consideration to the Portuguese Governmental Agency IAPMEI during the 2nd European Union Framework Programme. The first conclusion of the study is the significance of negative forecasting errors of post-investment sales and their implication in terms of the expected profitability. In contrast, forecasts on future operating costs were quite accurate and errors on investment expenses revealed high volatility. Also interesting is the finding that there seems to be no relationship between the size, industry, region, or investment incentives and the pattern of the errors found.