Information Distortion, R&D, and Growth
Posted: 21 Nov 2017
Date Written: November 19, 2017
Do firms' opportunistic withholding and disclosure of information affect their investment in R&D? To answer this question, we estimate a dynamic model that incorporates a trade-off between R&D investment and earnings manipulation. This model allows for the increase in the expected penalty for misreporting introduced by a disclosure regulation to translate into investment distortions and lost firm value. We find that incentives to distort information have a large impact on firm value of 13%. With these incentives in place, regulations to prevent information distortion spill over into distortions in real investment, whose volatility rises by 10%. This excess volatility in turn lowers firm value by half a percent.
Keywords: Information, disclosure, R&D, Growth
JEL Classification: E22, G31, G34, M41, K22, K42
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