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
Date Written: January 10, 2018
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
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