Financial Reporting Quality and Myopic Investments: Theory and Evidence

74 Pages Posted: 13 Aug 2020 Last revised: 13 May 2024

See all articles by Heng Geng

Heng Geng

Victoria University of Wellington

Cheng Zhang

University of Denver

Frank Zhou

University of Pennsylvania - The Wharton School

Date Written: June 1, 2020

Abstract

We present theory and empirical evidence that greater financial reporting quality can incentivize
myopic investments. In the model, greater financial reporting quality increases investor response
to earnings, elevating the manager’s incentive to invest myopically to improve earnings. Using the
setting of Big N auditors’ acquisitions of non-Big Ns, which increased investor response to earnings
for the acquired client firms, we find evidence supporting myopic investments. Specifically, acquired
clients decrease intangible investments, particularly when (1) the increase in investor response to
earnings is larger and (2) the horizon of shareholders is shorter. The investment decrease is inefficient, as evidenced by reduced profitability, fewer exploratory innovations, and other measures.

Keywords: financial reporting quality, investment efficiency, real effects, myopia, earnings response coefficient, accounting measurements, intangible investments, patents, innovations

JEL Classification: G14; G34; M41; M42; O31; O34; N22

Suggested Citation

Geng, Heng and Zhang, Cheng and Zhou, Frank, Financial Reporting Quality and Myopic Investments: Theory and Evidence (June 1, 2020). Available at SSRN: https://ssrn.com/abstract=3650784 or http://dx.doi.org/10.2139/ssrn.3650784

Heng Geng (Contact Author)

Victoria University of Wellington ( email )

PO Box 600
Wellington, 6140
New Zealand

Cheng Zhang

University of Denver ( email )

2101 S University Blvd
Denver, CO 80210
United States

Frank Zhou

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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