Ignorance Is Bliss: The Screening Effect of (Noisy) Information

Felix Zhiyu Feng, Wenyu Wang, Yufeng Wu and Gaoqing Zhang

Papers from arXiv.org

Abstract: This paper studies the value of a firm's internal information when the firm faces an adverse selection problem arising from unobservable managerial abilities. While more precise information allows the firm to make ex post more efficient investment decisions, noisier information has an ex ante screening effect that allows the firm to attract on-average better managers. The trade-off between more effective screening of managers and more informed investment implies a non-monotonic relationship between firm value and information quality. A marginal improvement in information quality does not necessarily lead to an overall improvement in firm value.

Date: 2023-02, Revised 2024-08
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