Information Distortion, R&D, and Growth

Stephen Terry, Anastasia Zakolyukina and Toni Whited

No 217, 2018 Meeting Papers from Society for Economic Dynamics

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%.

Date: 2018
New Economics Papers: this item is included in nep-dge and nep-ino
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