Signaling and Accounting Information
NBER Working Paper No. 3193
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.
Document Object Identifier (DOI): 10.3386/w3193