Ignorance Is Bliss: The Screening Effect of (Noisy) Information
47 Pages Posted: 8 Feb 2021 Last revised: 30 Oct 2023
Date Written: October 30, 2023
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: Suggested Citation