Ignorance Is Bliss: The Screening Effect of (Noisy) Information

47 Pages Posted: 8 Feb 2021 Last revised: 30 Oct 2023

See all articles by Felix Zhiyu Feng

Felix Zhiyu Feng

University of Washington - Michael G. Foster School of Business

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance

Yufeng Wu

Ohio State University (OSU)

Gaoqing Zhang

University of Minnesota - Twin Cities - Department of Accounting

Date Written: October 30, 2023

Abstract

This paper studies the value of a firm’s internal information when the firm faces an adverse selection problem arising from unobservable managerial abilities. While more precise information allows the firm to make ex post more efficient investment decisions, noisier information has an ex ante screening effect that allows the firm to attract on-average better managers. The trade-off between more effective screening of managers and more informed investment implies a non-monotonic relationship between firm value and information quality. A marginal improvement of information quality does not necessarily lead to an overall improvement of firm value.

Keywords: internal information, screening, corporate governance, accounting noise

JEL Classification: M41, D82, G34

Suggested Citation

Feng, Felix and Wang, Wenyu and Wu, Yufeng and Zhang, Gaoqing, Ignorance Is Bliss: The Screening Effect of (Noisy) Information (October 30, 2023). Available at SSRN: https://ssrn.com/abstract=3775306 or http://dx.doi.org/10.2139/ssrn.3775306

Felix Feng (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Yufeng Wu

Ohio State University (OSU) ( email )

812 Fisher Hall
2100 Neil Ave
Columbus, OH 43210
United States
43210 (Fax)

Gaoqing Zhang

University of Minnesota - Twin Cities - Department of Accounting ( email )

321 19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://https://carlsonschool.umn.edu/faculty/gaoqing-zhang

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