Information versus Investment

The Review of Financial Studies, Forthcoming

Chicago Booth Research Paper No. 19-02

Fama-Miller Working Paper

74 Pages Posted: 21 Nov 2017 Last revised: 31 Aug 2022

See all articles by Stephen Terry

Stephen Terry

Boston University

Toni M. Whited

University of Michigan, Department of Economics; National Bureau of Economic Research

Anastasia A. Zakolyukina

University of Chicago - Booth School of Business

Date Written: July 30, 2022

Abstract

We quantify the real implications of trade-offs between firm information disclosure and longterm 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.

Keywords: Information, Disclosure, R&D, Growth

JEL Classification: E22, G31, G34, M41, K22, K42, M40

Suggested Citation

Terry, Stephen and Whited, Toni M. and Zakolyukina, Anastasia A., Information versus Investment (July 30, 2022). The Review of Financial Studies, Forthcoming, Chicago Booth Research Paper No. 19-02, Fama-Miller Working Paper , Available at SSRN: https://ssrn.com/abstract=3073956 or http://dx.doi.org/10.2139/ssrn.3073956

Stephen Terry

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Toni M. Whited (Contact Author)

University of Michigan, Department of Economics ( email )

735 S. State Street
Ann Arbor,, MI 48109

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Anastasia A. Zakolyukina

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773.834.4838 (Phone)
773.926.0941 (Fax)

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