Financial Reporting Quality and Myopic Investments: Theory and Evidence

ABSTRACT We present theory and empirical evidence that greater financial reporting quality can incentivize myopic investments. In the model, increases investor response to earnings, elevating manager’s incentive invest myopically improve earnings. Using setting of Big N auditors’ acquisitions non-Big Ns, which increased earnings for acquired client firms, we find supporting Specifically, clients decrease intangible investments, particularly when (1) increase in is larger (2) horizon shareholders shorter. The investment inefficient, as evidenced by reduced profitability, fewer exploratory innovations, other measures. JEL Classifications: G14; G34; M41; M42; O31; O34; N22.