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Financing and Investment Efficiency, Information Quality, and Accounting Biases

35 Pages Posted: 7 Nov 2010 Last revised: 28 Nov 2013

Lin Nan

Purdue University

Xiaoyan Wen

Texas Christian University

Date Written: November 27, 2013

Abstract

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.

Keywords: conservatism, capital structure, information quality

JEL Classification: G31, G32, M41

Suggested Citation

Nan, Lin and Wen, Xiaoyan, Financing and Investment Efficiency, Information Quality, and Accounting Biases (November 27, 2013). UIC College of Business Administration Research Paper No. 10-14. Available at SSRN: https://ssrn.com/abstract=1703530 or http://dx.doi.org/10.2139/ssrn.1703530

Lin Nan

Purdue University ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
7654944438 (Phone)

Xiaoyan Wen (Contact Author)

Texas Christian University ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States

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