The accuracy of firm information disclosures and the efficiency of long-term investment both play crucial roles in the economy and capital markets. We estimate a dynamic model that captures a trade-off between these two goals that arises when managers confront realistic incentives to misreport financial statements and distort their real investment choices. Managers in our model distort reported profits by 6.7% of sales on average. Counterfactual analysis reveals that while eliminating this misreporting through disclosure regulation is possible, it incentivizes managers to distort real investment, which results in a 1% drop in average firm value, reflecting a quantitatively meaningfully tradeoff.

More on this topic

BFI Working Paper·Oct 21, 2026

Venture Capital and Customer Capital

Martin Aragoneses, Young Soo Jang, and Amir Sufi
Topics: Financial Markets
BFI Working Paper·Oct 21, 2026

When Cash Wakes Up: Inertia in Institutional Money Market Funds and the Potential Effects of AI Disruption

Ali Hortaçsu and Younggeun Yoo
Topics: Financial Markets
BFI Working Paper·Aug 31, 2026

Democratizing Private Markets: Equilibrium Predictions

Lubos Pastor, Robert F. Stambaugh, and Lucian A. Taylor
Topics: Financial Markets