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Dynamic effects of information disclosure on investment efficiency

Dutta, Sunil and Nezlobin, Alexander (2017) Dynamic effects of information disclosure on investment efficiency. Journal of Accounting Research, 55 (2). 329 - 369. ISSN 0021-8456

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Identification Number: 10.1111/1475-679X.12161

Abstract

This paper studies how information disclosure affects investment efficiency and investor welfare in a dynamic setting in which a firm makes sequential investments to adjust its capital stock over time. We show that the effects of accounting disclosures on investment efficiency and investor welfare crucially depend on whether such disclosures convey information about the firm's future capital stock (i.e., balance sheet) or about its future operating cash flows (i.e., earnings). Specifically, investment efficiency and investor welfare unambiguously increase in the precision of disclosures that convey information about the future capital stock, since such disclosures mitigate the current owners' incentives to underinvest. In contrast, when accounting reports provide information about future cash flows, the firm can have incentives to either under- or overinvest depending on the precision of accounting reports and the expected growth in demand. For such disclosures, investment efficiency and investor welfare are maximized by an intermediate level of precision. The two types of accounting disclosures act as substitutes in that the precision of capital stock disclosures that maximizes investment efficiency (and investor welfare) decreases as cash flow disclosures become more informative and vice versa.

Item Type: Article
Official URL: https://onlinelibrary.wiley.com/journal/1475679x
Additional Information: © 2016 University of Chicago on behalf of the Accounting Research Center
Divisions: Accounting
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
JEL classification: D - Microeconomics > D9 - Intertemporal Choice and Growth > D92 - Intertemporal Firm Choice and Growth, Investment, or Financing
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E22 - Capital; Investment (including Inventories); Capacity
G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting; Fixed Investment and Inventory Studies
M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M41 - Accounting
Date Deposited: 01 Nov 2019 16:24
Last Modified: 20 Jan 2020 07:07
URI: http://eprints.lse.ac.uk/id/eprint/102342

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