Time-varying Value of Information Acquisition: Learning and Financial Decisions

Abstract

This paper studies the costs and benefits of information acquisition and its influence on a firm's financial policies. Acquiring additional information improves learning about investment opportunities, thereby mitigating underinvestment, increasing borrowing, and encouraging higher payout. However, the acquisition cost can erode the benefits. The influence of cost is time-varying as the value of information increases (decreases) in bad (good) times. With dynamic learning, the firm responds to good and bad news differently, and its demand for information services becomes path-dependent. Moreover, increasing availability of public information can both crowd in and crowd out the firm's private information production incentives.

Keywords: learning, information acquisition, investment decisions, payout policy

JEL Classification: D8, G11, G32, G35