Within-Firm Information Frictions and the Role of Managerial Reporting Quality in Investment Efficiency

57 Pages Posted: 14 Dec 2022 Last revised: 13 Mar 2024

See all articles by Philip G. Berger

Philip G. Berger

University of Chicago - Chookaszian Accounting Research Center

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University

Lisa Yao Liu

Columbia University - Columbia Business School

M.H. Franco Wong

University of Toronto - Rotman School of Management

Date Written: October 11, 2023

Abstract

We investigate whether improved managerial reporting quality (MRQ) results in better investment decisions and test potential channels. We detail a conceptual framework that describes the possible channels by which the MRQ mechanism can improve firms’ investment efficiency, including internal information asymmetry, information uncertainty, and revising managers’ assessments of investment opportunities. To capture an exogenous improvement in MRQ, we use the unexpected application to cross-listed firms of the Sarbanes-Oxley provisions related to internal control attestation. Our base results show that improved MRQ leads to better investment efficiency and our channel tests suggest that reduced internal information asymmetry is the main channel. The tests illustrate how segment data aid in identifying the separate channels of uncertainty reduction, changes to management’s priors about their firm’s investment opportunities, and lowered internal information asymmetry in improving investment efficiency.

Keywords: Managerial reporting, information asymmetry, information uncertainty, Sarbanes-Oxley, internal controls, investment efficiency, segment data.

JEL Classification: D83, G15, G18, G38, L15, M41, M42.

Suggested Citation

Berger, Philip G. and Li, Feng and Liu, Lisa Yao and Wong, M.H. Franco, Within-Firm Information Frictions and the Role of Managerial Reporting Quality in Investment Efficiency (October 11, 2023). Columbia Business School Research Paper No. 4286813, Available at SSRN: https://ssrn.com/abstract=4286813 or http://dx.doi.org/10.2139/ssrn.4286813

Philip G. Berger (Contact Author)

University of Chicago - Chookaszian Accounting Research Center ( email )

1101 East 58th Street
Chicago, IL 60637-1561
United States

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University ( email )

211 West Huaihai Road
Shanghai, Shanghai 200030
China

Lisa Yao Liu

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

M.H. Franco Wong

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-946-0729 (Phone)

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Wong.aspx

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