Dynamic Effects of Information Disclosure on Investment Efficiency

Posted: 15 Sep 2017

See all articles by Sunil Dutta

Sunil Dutta

University of California, Berkeley - Haas School of Business

Alexander Nezlobin

University of California, Berkeley - Haas School of Business

Date Written: May 1, 2017

Abstract

This paper studies how information disclosure affects investment efficiency and investor welfare in a dynamic setting in which a firm makes sequential investments to adjust its capital stock over time. We show that the effects of accounting disclosures on investment efficiency and investor welfare crucially depend on whether such disclosures convey information about the firm's future capital stock (i.e., balance sheet) or about its future operating cash flows (i.e., earnings). Specifically, investment efficiency and investor welfare unambiguously increase in the precision of disclosures that convey information about the future capital stock, since such disclosures mitigate the current owners' incentives to under-invest. In contrast, when accounting reports provide information about future cash flows, the firm can have incentives to either under- or over-invest depending on the precision of accounting reports and the expected growth in demand. For such disclosures, investment efficiency and investor welfare are maximized by an intermediate level of precision. The two types of accounting disclosures act as substitutes in that the precision of capital stock disclosures that maximizes investment efficiency (and investor welfare) decreases as cash flow disclosures become more informative and vice versa.

Keywords: investment; information disclosure; real effects; welfare

JEL Classification: D92; E22; G31; M41

Suggested Citation

Dutta, Sunil and Nezlobin, Alexander, Dynamic Effects of Information Disclosure on Investment Efficiency (May 1, 2017). Journal of Accounting Research, Vol. 55, No. 2, 2017, Available at SSRN: https://ssrn.com/abstract=3036091

Sunil Dutta

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-643-1229 (Phone)
510-643-1412 (Fax)

Alexander Nezlobin (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

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