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The Information-Leveling Role of Voluntary Disclosure Quality in Facilitating Investment Efficiency

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Title:The Information-Leveling Role of Voluntary Disclosure Quality in Facilitating Investment Efficiency
Authors:Chen-Lung Chin
Peng-Chia Chiu
Timothy Haight
Po-Hsiang Yu
Keywords:management forecast properties
information environment
investment efficiency
Date Issued:03 Jul 2019
Abstract:This study examines whether and under what conditions voluntary disclosure quality plays an information-leveling role in facilitating investment efficiency. Measuring voluntary disclosure quality as the (inverse) standard deviation of managers’ prior earnings forecast errors (i.e., management forecast consistency), we document a positive association between management forecast consistency and investment efficiency that strengthens when the information environment becomes more constrained and when there are negative shocks to financial reporting quality. We also find that the management forecast consistency/investment efficiency association strengthens when firms are younger, faster growing, and financially constrained, but not when firms are weakly governed and financially unconstrained, which suggests that voluntary disclosure quality facilitates investment efficiency by mitigating adverse selection (but not moral hazard) frictions. Last, when we employ a changes-based model, we find that increases in management forecast consistency are associated with increases in investment efficiency, which mitigates concerns that voluntary disclosure quality’s empirical link to investment efficiency is purely driven by managers’ inherent forecasting abilities. Overall, we show that voluntary disclosure quality can facilitate investment efficiency when financial reporting and other elements of the information environment are constrained in their ability to mitigate market frictions that impede efficiency.
Appears in Collections: 07 Financial: Disclosure

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