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.
Authors
- Acknowledgements & Disclosure
- We thank Clark Hyde, Hossein Pourreza, and Vadim Cherepanov for outstanding research support. We would also like to thank our discussants Brent Glover, Johan Hombert, and Massimiliano Croce for helpful comments. This work would have been impossible without the Extreme Science and Engineering Discovery Environment (XSEDE), which is supported by National Science Foundation grant number ACI-1053575. This research was funded in part by the Fama-Miller Center for Research in Finance at the University of Chicago Booth School of Business. Zakolyukina acknowledges financial support from the IBM Corporation Faculty Research Fund and the University of Chicago Booth School of Business, and research support from the University of Chicago Research Computing Center. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w29636
- Published in
- United States of America
