Signaling and Accounting Information

Stewart C. Myers

NBER Working Paper No. 3193
Issued in December 1989
NBER Program(s):   ME

This paper develops a signaling model in which accounting information improves real investment decisions. Pure cash flow reporting is shown to lead to underinvestment when managers have superior information but are acting in shareholders' interests. Accounting by prespecified, "objective" rules alleviates the underinvestment problem.

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