Dynamic E ects of Information Disclosure on Investment E ciency

This paper studies how information disclosure a ects investment e ciency and investor welfare in a dynamic setting in which a rm makes sequential investments to adjust its capital stock over time. We show that the e ects of accounting disclosures on investment e ciency and investor welfare crucially depend on whether such disclosures convey information about the rm's future capital stock or about its future operating cash ows. Speci cally, we nd that investment e ciency 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 ows, the rm can have incentives to either underor overinvest depending on the precision of accounting reports and the expected growth in demand. For such disclosures, we nd that investment e ciency 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 e ciency (and investor welfare) decreases as cash ow disclosures become more informative and vice versa.