Information versus Investment

55 Pages Posted: 21 Nov 2017 Last revised: 31 Jul 2020

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

Abstract

The accuracy of firm information disclosures and the efficiency of long-term investment both play crucial roles in the economy and capital markets. We estimate a dynamic model that captures a trade-off between these two goals that arises when managers confront realistic incentives to misreport financial statements and distort their real investment choices. Managers in our model distort reported profits by 6.7% of sales on average. Counterfactual analysis reveals that while eliminating this misreporting through disclosure regulation is possible, it incentivizes managers to distort real investment, which results in a 1% drop in average firm value, reflecting 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, Fama-Miller Working Paper , Available at SSRN: https://ssrn.com/abstract=3073956 or http://dx.doi.org/10.2139/ssrn.3073956

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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