Beta estimation precision and corporate investment efficiency

Survey evidence suggests most firms use the CAPM to estimate their cost of equity. Previous research has documented these estimates can be extremely imprecise. We study the impact of the precision of beta estimates on firm investment decisions, and find that firms with precise beta estimates invest closer to their expected levels. We employ quantile regressions to further examine the relationship between Beta Precision and investment levels and find that firms with more precise betas tend to avoid extremes in investment levels. Finally, we show that precision in the estimation of cost of equity is associated with higher risk-adjusted stock returns.