Financing and Investment Efficiency, Information Quality, and Accounting Biases

Lin Nan () and Xiaoyan Wen ()
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Lin Nan: Krannert School of Management, Purdue University, West Lafayette, Indiana 47907
Xiaoyan Wen: Department of Accounting, University of Illinois at Chicago, Chicago, Illinois 60607

Management Science, 2014, vol. 60, issue 9, 2308-2323

Abstract: In this paper, we investigate the effect of accounting biases on firms' financing decisions and the role of accounting biases in endogenous information quality. We show that in industries with generally low-profit prospects, a downward-biased accounting system performs better than a neutral accounting system, and a more downward bias helps mitigate both investment and financing inefficiency; whereas for industries with generally high-profit prospects, an upward-biased accounting system is better than a neutral accounting system, and a more upward bias helps improve financing efficiency. In addition, we find that a more downward-biased accounting system motivates good firms to exert more effort to improve the information quality, which improves overall efficiency. This paper was accepted by Mary Barth, accounting .

Keywords: accounting; cost-benefit analysis; decision analysis (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (17)

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