Financing and Investment Efficiency, Information Quality, and Accounting Biases
University of Illinois at Chicago - College of Business Administration
November 27, 2013
UIC College of Business Administration Research Paper No. 10-14
In this paper, we investigate the effect of accounting biases on firms' financing decisions and the role of accounting biases in endogenous information quality. We show that in industries with generally low-profit prospects, a downward-biased accounting system performs better than a neutral accounting system, and a more downward bias helps mitigate both investment and financing inefficiency; while for industries with generally high-profit prospects, an upward-biased accounting system is better than a neutral accounting system, and a more upward bias helps improve financing efficiency. In addition, we find that a more downward-biased accounting system motivates good firms to exert more effort to improve the information quality, which improves overall efficiency.
Number of Pages in PDF File: 35
Keywords: conservatism, capital structure, information quality
JEL Classification: G31, G32, M41
Date posted: November 7, 2010 ; Last revised: November 28, 2013
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