Purpose The purpose of this study is to document the increased difficulty of earnings forecasting associated with a firm’s engagement in foreign direct investments (FDI), by examining the forecast characteristics of both managers and analysts following announcement of FDI engagement by firms. Design/methodology/approach Using a sample of 14,721 (114,284) management (analyst) earnings forecasts, the authors conduct a series of forecast-level panel regressions to examine the associations between a firm’s FDI and the characteristics of earnings forecasts from both managers and analysts. The authors also undertake 2SLS Instrumental Variable regressions to address concerns of potential endogeneity in their setting. Findings This study finds that a greater extent of FDI engagement is associated with less accurate management earnings forecasts and analyst earnings forecasts. This negative association is partially mitigated for firms with high ability managers. For management earnings forecasts, this negative relationship is restricted to forecasts with positive bias, while for analysts, both positive and negative biased forecasts are less accurate. FDI engagement is also associated with higher forecast bias for both manager and analysts, as well as forecasts with shorter horizons, forecasts with lower precision for managers, and a greater dispersion of analysts’ consensus. Research limitations/implications This study sheds light on previously undocumented consequences that FDI engagement can have on the engaging firm, specifically in terms of its effect on the earnings forecast process of both managers and financial analysts. Practical implications The results of this study document the effect that FDI engagement has on the earnings forecasting task beyond that of existing foreign operations. The lower accuracy of forecasts for both analysts and managers, and the asymmetric concentration of lower accuracy in management earnings forecasts have implications for stock market participants. In addition, managers should be aware of FDI engagements making analyst forecasting more difficult and provide additional disclosure regarding these engagements to mitigate the increased information asymmetry. Originality/value While prior literature explored forecasting behavior in situations where a firm already has ongoing foreign operations, this study extends this body of research by documenting that a firm’s initial engagement in foreign investment ventures has an impact that is incremental to that of ongoing foreign operations.
Lee et al. (Mon,) studied this question.