Information versus Investment

56 Pages Posted: 21 Nov 2017 Last revised: 9 Jan 2019

See all articles by Stephen Terry

Stephen Terry

Boston University

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Anastasia A. Zakolyukina

University of Chicago - Booth School of Business

Date Written: November 1, 2018


Firms' efficient long-term investment and accurate reporting of information about performance both serve crucial roles in the economy and capital markets. We argue quantitatively that the two goals are in direct conflict in the presence of realistic manager compensation contracts, which provide managers with incentives both to misreport financial statements and to distort their real investment choices. We build a dynamic structural model rich enough to capture a natural tradeoff between investment and information. The model matches a range of observable moments constructed from data on firm investment and periods of detected misreporting by firms. Counterfactuals show that regulations preventing misreporting do in fact incentivize managers to distort real investment, whose volatility rises. This excess volatility lowers firm value, suggesting a quantitatively meaningfully tradeoff.

Keywords: Information, Disclosure, R&D, Growth

JEL Classification: E22, G31, G34, M41, K22, K42

Suggested Citation

Terry, Stephen and Whited, Toni M. and Zakolyukina, Anastasia A., Information versus Investment (November 1, 2018). Chicago Booth Research Paper No. 19-02, Available at SSRN: or

Stephen Terry

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Toni M. Whited (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Anastasia A. Zakolyukina

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773.834.4838 (Phone)
773.926.0941 (Fax)

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