Financing Capacity, Investment, and Reporting Quality

We identify an exogenous shock to the financing capacity of a firm (proxied by changes in the value of the firm’s real estate assets) to examine (i) the relation between reporting quality and investments conditional on this shock, and (ii) firms’ disclosure responses to the shock. We find that investment by firms with higher reporting quality is less affected by changes in real estate values than is investment by firms with lower reporting quality. Further, firms increase reporting quality in response to decreases in external financing capacity. Our findings contribute to the literature on reporting quality and investment, and to the literature on the determinants of disclosure choices. First draft: March 7, 2011 This draft: May 12, 2011 _______________ * Corresponding author. We gratefully acknowledge comments from Ilan Gutman, Jeff Ng, Joe Weber, Luo Zuo and seminar participants at 2011 CARE-CEASA conference, Interdisciplinary Center Herzliya, University of Pittsburg, and University of Missouri. We are also grateful to the financial support of the Wharton School and the MIT Sloan School of Management.