Information versus Investment
The Review of Financial Studies, Forthcoming
74 Pages Posted: 21 Nov 2017 Last revised: 31 Aug 2022
Date Written: July 30, 2022
We quantify the real implications of trade-offs between firm information disclosure and longterm investment efficiency. We estimate a dynamic equilibrium model in which firm managers confront realistic incentives to misreport earnings and distort their real investment choices. The model implies a socially optimal level of disclosure regulation that exceeds the estimated value. Counterfactual analysis reveals that eliminating earnings misreporting completely through disclosure regulation incentivizes managers to distort real investment. Lower earnings informativeness raises the cost of capital, which results in a 5.7% drop in average firm value, but more modest effects on social welfare and aggregate growth.
Keywords: Information, Disclosure, R&D, Growth
JEL Classification: E22, G31, G34, M41, K22, K42, M40
Suggested Citation: Suggested Citation