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Information Distortion, R&D, and Growth

Author

Listed:
  • Stephen Terry

    (Boston University)

  • Anastasia Zakolyukina

    (The University of Chicago)

  • Toni Whited

    (University of Michigan)

Abstract

Does firms' opportunistic information disclosure affect investment in R&D? To answer this question, we estimate a dynamic model that incorporates a trade-off between R&D investment and accruals manipulation. This trade-off arises because both are effective tools for distorting observable earnings. Distortion incentives stem from the combination of incomplete investor information and short-term manager compensation incentives based on the stock price. These incentives alone hurt shareholder value by 13%. With these incentives in place, regulations preventing information distortion further distort real investment, whose volatility rises by 10%. This excess volatility lowers firm value by 0.5%.

Suggested Citation

  • Stephen Terry & Anastasia Zakolyukina & Toni Whited, 2018. "Information Distortion, R&D, and Growth," 2018 Meeting Papers 217, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:217
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    1. Josef Schroth, 2020. "Outside Investor Access to Top Management: Market Monitoring versus Stock Price Manipulation," Staff Working Papers 20-43, Bank of Canada.

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