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Information versus Investment

Author

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  • Stephen J. Terry
  • Toni M. Whited
  • Anastasia A. Zakolyukina

Abstract

We quantify the real implications of trade-offs between firm information disclosure and long-term investment efficiency. We estimate a dynamic equilibrium model in which firm managers confront realistic incentives to misreport earnings and distort their real investment choices. The model implies a socially optimal level of disclosure regulation that exceeds the estimated value. Counterfactual analysis reveals that eliminating earnings misreporting completely through disclosure regulation incentivizes managers to distort real investment. Lower earnings informativeness raises the cost of capital, which results in a 5.7% drop in average firm value, but more modest effects on social welfare and aggregate growth.

Suggested Citation

  • Stephen J. Terry & Toni M. Whited & Anastasia A. Zakolyukina, 2022. "Information versus Investment," NBER Working Papers 29636, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29636
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    1. Alperovych, Yan & Cumming, Douglas & Czellar, Veronika & Groh, Alexander, 2021. "M&A rumors about unlisted firms," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1324-1339.

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    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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