Finance Guest Seminar: Toni Whited
The Carlson Finance department welcomes Toni Whited, from the University of Michigan, to present her work:
Title: Information Distortion, R&D, and Growth
Does firms' opportunistic information disclosure affect investment in R&D? To answer this question, we estimate a dynamic model of long-term growth based on innovation through R&D. In the model, managers have an incentive to distort observable earnings, where this incentive arises from the combination of incomplete investor information and convex manager compensation incentives based on the stock price. Managers distort earnings by misreporting or by deviating from first-best R&D policy. The model fits a broad set of moments related to both real R&D expenditures and earnings restatements. Counterfactuals show that regulations preventing information concealment incentivize managers to distort real R&D investment, whose volatility rises by 10%. This excess volatility lowers firm value by 0.5%.