Working Paper: NBER ID: w29636
Authors: Stephen J. Terry; Toni M. Whited; Anastasia A. Zakolyukina
Abstract: 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.
Keywords: Information Disclosure; Investment Efficiency; Earnings Misreporting; Dynamic Equilibrium Model; Disclosure Regulation
JEL Codes: G14; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increasing disclosure regulation (G38) | Reducing earnings manipulation (G38) |
| Increasing disclosure regulation (G38) | Enhancing earnings informativeness (G14) |
| Enhancing earnings informativeness (G14) | Lowering cost of capital (G32) |
| Lowering cost of capital (G32) | Higher firm value (G32) |
| Excessive regulation (L51) | Increased manipulation of real investments (G11) |
| Increased manipulation of real investments (G11) | Lowering firm value (G32) |
| Completely eliminating earnings misreporting through stringent regulation (G38) | 57% drop in average firm value (G32) |
| Increasing regulation (G18) | Decreased earnings manipulation and enhanced earnings informativeness (G14) |
| Increasing regulation (G18) | Decline in earnings informativeness (G14) |
| Increasing regulation (G18) | Increased cost of capital (G31) |