Research / BFI Working PaperJan 14, 2022

Information versus Investment

Stephen J. Terry, Toni M. Whited, Anastasia A. Zakolyukina

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

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