The Relation between Reporting Quality and Financing and Investment: Evidence from Changes in Financing Capacity

We use changes in the value of a firm's real estate assets as an exogenous change in a firm's financing capacity to examine (1) the relation between reporting quality and financing and investment conditional on this change, and (2) firms’ reporting quality responses to the change in financing capacity. We find that financing and investment by firms with higher reporting quality is less affected by changes in real estate values than are financing and investment by firms with lower reporting quality. Further, firms increase reporting quality in response to decreases in financing capacity. Our findings contribute to the literature on reporting quality and investment, and on the determinants of reporting quality choices.

[1]  James R. Frederickson,et al.  Disclosure Quality and Capital Investment , 2010 .

[2]  C. Himmelberg,et al.  Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions , 2005 .

[3]  Bipin B. Ajinkya,et al.  Corporate Managers' Earnings Forecasts and Symmetrical Adjustments of Market Expectations , 1984 .

[4]  Krishna G. Palepu,et al.  Stock Performance and Intermediation Changes Surrounding Sustained Increases in Disclosure , 1999 .

[5]  Joseph D. Piotroski,et al.  Capital Allocation and Timely Accounting Recognition of Economic Losses , 2011 .

[6]  Ryan T. Ball,et al.  The Debt Contracting Value of Accounting Information and Loan Syndicate Structure , 2007 .

[7]  Gregory B. Waymire.  ADDITIONAL EVIDENCE ON THE INFORMATION-CONTENT OF MANAGEMENT EARNINGS FORECASTS , 1984 .

[8]  Mark T. Leary,et al.  Do Firms Rebalance Their Capital Structures? , 2004 .

[9]  Christian Leuz,et al.  The Economic Consequences of Increased Disclosure , 1999 .

[10]  Roni Michaely,et al.  Are Dividend Changes a Sign of Firm Maturity , 2002 .

[11]  Panos N. Patatoukas,et al.  More Evidence of Bias in the Differential Timeliness Measure of Conditional Conservatism , 2010 .

[12]  Anne Beatty,et al.  Financial Reporting Quality, Private Information, Monitoring and the Lease-Versus-Buy Decision , 2010 .

[13]  M. C. Jensen,et al.  Harvard Business School; SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit , 1976 .

[14]  Steven M. Fazzari,et al.  Financing Constraints and Corporate Investment , 1987 .

[15]  Jere R. Francis,et al.  Acquisition Profitability and Timely Loss Recognition , 2009 .

[16]  Shorey Peterson,et al.  The Modern Corporation and Private Property. , 1933 .

[17]  Scott A. Richardson,et al.  Over-investment of free cash flow , 2006 .

[18]  Robert E. Verrecchia,et al.  Market liquidity and volume around earnings announcements , 1994 .

[19]  Andrew B. Abel.  Optimal Investment under Uncertainty , 1983 .

[20]  John S. Hughes,et al.  Earnings Quality, Insider Trading, and Cost of Capital , 2003 .

[21]  NG TeeYongJeffrey.  Management Forecast Credibility and Underreaction to News , 2014 .

[22]  Baruch Lev,et al.  To warn or not to warn: Management disclosures in the face of an earnings surprise , 1995 .

[23]  Rodrigo S. Verdi,et al.  Implications of Transaction Costs for the Post-Earnings-Announcement Drift , 2007 .

[24]  Charles M. C. Lee,et al.  Inferring Trade Direction from Intraday Data , 1991 .

[25]  E. Duflo,et al.  How Much Should We Trust Differences-in-Differences Estimates? , 2001 .

[26]  Mark H. Lang,et al.  Voluntary Disclosure and Equity Offerings: Reducing Information Asymmetry or Hyping the Stock?* , 1997 .

[27]  Katherine Schipper,et al.  The market pricing of accruals quality , 2005 .

[28]  Robert E. Verrecchia,et al.  When Does Information Asymmetry Affect the Cost of Capital? , 2010 .

[29]  D. Thesmar,et al.  The Collateral Channel: How Real Estate Shocks Affect Corporate Investment , 2009 .

[30]  Gary C. Biddle,et al.  Accounting Quality and Firm-Level Capital Investment , 2006 .

[31]  Hiroshi Yoshikawa,et al.  On the "q" Theory of Investment , 1980 .

[32]  Richard G. Sloan,et al.  The Relation between Corporate Financing Activities, Analysts' Forecasts and Stock Returns , 2006 .

[33]  S. Kothari,et al.  On Estimating Conditional Conservatism , 2011 .

[34]  Ananth N. Madhavan,et al.  Why Do Security Prices Change? A Transaction-Level Analysis of Nyse Stocks , 1996 .

[35]  Sreedhar T. Bharath,et al.  Accounting Quality and Debt Contracting , 2008 .

[36]  D. Nanda,et al.  Accounting Information , Disclosure , and the Cost of Capital , 2007 .

[37]  R. Hubbard,et al.  Capital-Market Imperfections and Investment , 1997 .

[38]  Sorin M. Sorescu,et al.  Estimation Risk, Information, and the Conditional CAPM: Theory and Evidence , 2008 .

[39]  J. Gan.  The Real Effects of Asset Market Bubbles : Loan-and Firm-Level Evidence of a Lending Channel , 2005 .

[40]  Ronald W. Masulis,et al.  Seasoned Equity Offerings: Quality of Accounting Information and Expected Flotation Costs , 2008 .

[41]  Benjamin Segal,et al.  The Incremental Information Content of Tone Change in Management Discussion and Analysis , 2008 .

[42]  Ole‐Kristian Hope,et al.  Managerial Empire Building and Firm Disclosure , 2008 .

[43]  C. Leuz,et al.  Disclosure and the Cost of Capital: Evidence from Firms’ Responses to the Enron Shock , 2008 .

[44]  N. Bergman,et al.  Collateral Pricing , 2007 .

[45]  J. Stiglitz,et al.  Credit Rationing in Markets with Imperfect Information , 1981 .

[46]  Gary C. Biddle,et al.  How Does Financial Reporting Quality Relate to Investment Efficiency? , 2009 .

[47]  Kurt Mandelbaum,et al.  The Modern Corporation and Private Property , 1933 .

[48]  Feng Li.  The Information Content of Forward-Looking Statements in Corporate Filings—A Naïve Bayesian Machine Learning Approach , 2010 .

[49]  Maureen F. McNichols,et al.  Does Earnings Management Affect Firms' Investment Decisions? , 2008 .

[50]  Sudipta Basu.  The conservatism principle and the asymmetric timeliness of earnings , 1997 .

[51]  Patricia M. Dechow,et al.  The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors , 2002 .

[52]  Feng Li.  Annual Report Readability, Current Earnings, and Earnings Persistence , 2008 .

[53]  Douglas J. Skinner.  WHY FIRMS VOLUNTARILY DISCLOSE BAD-NEWS , 1994 .

[54]  Jonathan L. Rogers,et al.  Credibility of Management Forecasts , 2003 .

[55]  Fumio Hayashi,et al.  TOBIN'S MARGINAL q AND AVERAGE q: A NEOCLASSICAL INTERPRETATION , 1982 .

[56]  Minsky,et al.  Theory of Investment , 1975 .

[57]  Heitor Almeida,et al.  Financial Constraints, Asset Tangibility, and Corporate Investment , 2004 .

[58]  Amir Sufi,et al.  House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis , 2009 .

[59]  Michael R. Roberts,et al.  The Response of Corporate Financing and Investment to Changes in the Supply of Credit , 2007, Journal of Financial and Quantitative Analysis.

[60]  Regina Wittenberg-Moerman,et al.  The role of information asymmetry and financial reporting quality in debt trading: Evidence from the secondary loan market $ , 2008 .

[61]  R. Jennings.  Unsystematic Security Price Movements, Management Earnings Forecasts, And Revisions In Consensus Analyst Earnings Forecasts , 1987 .

[62]  Charles E. Wasley,et al.  A Unified Framework of Management Earnings Forecasts: , 2010 .

[63]  Owen A. Lamont.  Cash Flow and Investment: Evidence from Internal Capital Markets , 1996 .

[64]  Credibility of Management Forecasts , 2005 .