Information versus Investment
56 Pages Posted: 21 Nov 2017 Last revised: 9 Jan 2019
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: Suggested Citation