Profit Expectations and Investment

6 Pages Posted: 2 May 2005

See all articles by Seamus MacGorian

Seamus MacGorian

Bank of England - Monetary Analysis

Jamie N.R. Thompson

Bank of England

Abstract

This article examines the relationship between expectations of future profits and companies' physical investment. Theory suggests that increased profit expectations should raise share prices as well as investment. But this correlation between investment and share prices may be rather weak if investors' opinions of companies' prospects differ from those of the companies' managers. Using a simple aggregate investment equation, the article illustrates that measures of profit expectations based on current profits and analysts' earnings forecasts appear to be more informative for investment than stock prices themselves. This result is consistent with recent research at the Bank using company data.

Suggested Citation

MacGorian, Seamus and Thompson, Jamie N.R., Profit Expectations and Investment. Available at SSRN: https://ssrn.com/abstract=708983

Seamus MacGorian (Contact Author)

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Jamie N.R. Thompson

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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