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Information versus Investment

Stephen Terry, Toni Whited and Anastasia Zakolyukina

No 29636, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G14 O4 (search for similar items in EconPapers)
Date: 2022-01
New Economics Papers: this item is included in nep-cfn
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Published as Stephen J Terry & Toni M Whited & Anastasia A Zakolyukina & Itay Goldstein, 2023. "Information versus Investment," The Review of Financial Studies, vol 36(3), pages 1148-1191.

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