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The Relation between Reporting Quality and Financing and Investment: Evidence from Changes in Financing Capacity

52 Pages Posted: 24 Sep 2011 Last revised: 8 Jul 2013

Karthik Balakrishnan

London Business School

John E. Core

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT)

Multiple version iconThere are 2 versions of this paper

Date Written: July 3, 2013

Abstract

We use changes in the value of a firm’s real estate assets as an exogenous change in a firm’s financing capacity to examine (i) the relation between reporting quality and financing and investment conditional on this change, and (ii) firms’ reporting quality responses to the change in financing capacity. We find that financing and investment by firms with higher reporting quality is less affected by changes in real estate values than are financing and investment by firms with lower reporting quality. Further, firms increase reporting quality in response to decreases in financing capacity. Our findings contribute to the literature on reporting quality and investment, and on the determinants of reporting quality choices.

Keywords: Reporting quality, investment, collateral, financing constraints

JEL Classification: D20, E51, G30, G31, G32, M41

Suggested Citation

Balakrishnan, Karthik and Core, John E. and Verdi, Rodrigo S., The Relation between Reporting Quality and Financing and Investment: Evidence from Changes in Financing Capacity (July 3, 2013). Available at SSRN: https://ssrn.com/abstract=1932349 or http://dx.doi.org/10.2139/ssrn.1932349

Karthik Balakrishnan

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

John E. Core

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02138
United States

Rodrigo S. Verdi (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
100 Main Street E62-666
Cambridge, MA 02142
United States
(617) 253 2956 (Phone)

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