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 (i) the relation between reporting quality and financing and investment conditional on this change, and (ii) 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. First draft: March 7, 2011 This draft: July 3, 2013 _______________ * Corresponding author. We gratefully acknowledge comments from an anonymous referee, Phil Berger (the Editor), Ilan Gutman, Melissa Lewis (discussant), Scott Liao (discussant), Jeff Ng, Cathy Schrand, Joe Weber, Jing Wu, Gwen Yu (discussant), Luo Zuo, and seminar participants at the 2011 CARE-CEASA conference, the Interdisciplinary Center Herzliya, the 2011 NYU Summer Camp, the 2011 Stanford Summer Camp, the 2011 University of Colorado Summer Accounting Conference, the 2012 American Accounting Association Annual meetings, the University of Missouri, the University of Pittsburgh, and the University of Texas at Austin. We are indebted to David Sraer for his help with data issues. We are also grateful for the financial support of the Wharton School and the MIT Sloan School of Management.