NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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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