Internal Information Quality and the Sensitivity of Investment to Market Prices and Accounting Profits

54 Pages Posted: 4 Oct 2014 Last revised: 22 Jan 2018

See all articles by Shane Heitzman

Shane Heitzman

University of Southern California - Marshall School of Business

Mengjie Huang

University of Rochester - Simon Business School

Multiple version iconThere are 2 versions of this paper

Date Written: January 10, 2018

Abstract

We ask whether the quality of internal information matters for investment decisions. We predict that investment is more sensitive to internal profit signals and less sensitive to external price signals when managers have higher quality internal information. Consistent with recent theoretical and empirical research, we proxy for internal information quality using observable information properties. We find that the sensitivity of investment to profitability is increasing, while the sensitivity of investment to market-to-book is decreasing in internal information quality. Our focus on internal information and decision making offers new and unique insights on the importance of information quality and complements the growing literature on the role of external reporting quality in reducing financing frictions.

Keywords: Investment, Information Quality, Reporting Quality, Internal Information, Accounting

JEL Classification: M41, G14, G31, L23, D82

Suggested Citation

Heitzman, Shane and Huang, Mengjie, Internal Information Quality and the Sensitivity of Investment to Market Prices and Accounting Profits (January 10, 2018). Available at SSRN: https://ssrn.com/abstract=2504632 or http://dx.doi.org/10.2139/ssrn.2504632

Shane Heitzman (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Mengjie Huang

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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