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Internal Information Quality and the Sensitivity of Investment to Market Prices and Accounting Profits†

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  • Shane Heitzman
  • Mengjie Huang

Abstract

We ask whether the quality of internal information matters for investment decisions. We predict that investment is more sensitive to internal profit signals and less sensitive to external price signals when managers have higher‐quality internal information. Consistent with recent theoretical and empirical research, we proxy for internal information quality using observable information properties. We find that the sensitivity of investment to profitability is increasing, while the sensitivity of investment to market‐to‐book is decreasing in internal information quality. Our focus on internal information and decision making offers new and unique insights on the importance of information quality and complements the growing literature on the role of external reporting quality in reducing financing frictions. Qualité de l'information interne et sensibilité de l'investissement aux prix du marché et aux bénéfices comptables Les auteurs se demandent si la qualité de l'information interne intervient dans la prise de décisions d'investissement. Selon leur hypothèse, l'investissement est plus sensible aux indicateurs de bénéfices internes et l'est moins aux indicateurs de prix externes lorsque les gestionnaires disposent d'information interne de qualité supérieure. Dans la foulée de récentes recherches théoriques et empiriques, ils utilisent comme variable de substitution à la qualité de l'information interne les caractéristiques observables de l'information. Ils constatent que la sensibilité de l'investissement à la rentabilité croît, alors que la sensibilité de l'investissement à la valeur de marché par rapport à la valeur comptable décroît, en fonction de la qualité de l'information interne. Leurs recherches sur l'information interne et la prise de décisions livrent des renseignements nouveaux et inédits sur l'importance de la qualité de l'information et enrichissent les écrits de plus en plus abondants sur le rôle de la qualité de l'information externe dans la réduction des frictions liées au financement.

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  • Shane Heitzman & Mengjie Huang, 2019. "Internal Information Quality and the Sensitivity of Investment to Market Prices and Accounting Profits†," Contemporary Accounting Research, John Wiley & Sons, vol. 36(3), pages 1699-1723, September.
    • Handle: RePEc:wly:coacre:v:36:y:2019:i:3:p:1699-1723
    DOI: 10.1111/1911-3846.12468
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    1. Duarte, Jefferson & Young, Lance, 2009. "Why is PIN priced?," Journal of Financial Economics, Elsevier, vol. 91(2), pages 119-138, February.
    2. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
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    Cited by:

    1. Itay Goldstein & Shijie Yang & Luo Zuo, 2023. "The Real Effects of Modern Information Technologies: Evidence from the EDGAR Implementation," Journal of Accounting Research, Wiley Blackwell, vol. 61(5), pages 1699-1733, December.
    2. Sani, Jalal & Shroff, Nemit & White, Hal, 2023. "Spillover effects of mandatory portfolio disclosures on corporate investment," Journal of Accounting and Economics, Elsevier, vol. 76(2).
    3. Ferracuti, Elia, 2022. "Information uncertainty and organizational design," Journal of Accounting and Economics, Elsevier, vol. 74(1).
    4. Lee, Eugenia Y. & Ha, Wonsuk & Park, Sunyoung, 2023. "Auditor specialization in R&D and clients’ R&D investment-q sensitivity," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(2).
    5. Itay Goldstein & Shijie Yang & Luo Zuo, 2020. "The Real Effects of Modern Information Technologies: Evidence from the EDGAR Implementation," NBER Working Papers 27529, National Bureau of Economic Research, Inc.
    6. Biehl, Henrike & Bleibtreu, Christopher & Stefani, Ulrike, 2024. "The real effects of financial reporting: Evidence and suggestions for future research," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 54(C).
    7. Lijuan Wu & Shanyue Jin, 2022. "Corporate Social Responsibility and Sustainability: From a Corporate Governance Perspective," Sustainability, MDPI, vol. 14(22), pages 1-15, November.
    8. Kelly Huang & Brent Lao & Gregory McPhee, 2020. "Internal information quality and patent‐related innovation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(3-4), pages 489-518, March.
    9. Ye, Mao & Zheng, Miles Y. & Zhu, Wei, 2023. "The effect of tick size on managerial learning from stock prices," Journal of Accounting and Economics, Elsevier, vol. 75(1).
    10. Habib Saragih, Arfah & Ali, Syaiful & Suwardi, Eko & Utomo, Hargo, 2024. "Finding the missing pieces to an optimal corporate tax savings: Information technology governance and internal information quality," International Journal of Accounting Information Systems, Elsevier, vol. 52(C).
    11. Liu, Yongda & Padgett, Carol & Yin, Chao, 2022. "Internal information quality and financial policy peer effects," International Review of Financial Analysis, Elsevier, vol. 84(C).
    12. Pereira da Silva, Paulo, 2021. "Do managers pay attention to the market? A review of the relationship between stock price informativeness and investment," Journal of Multinational Financial Management, Elsevier, vol. 59(C).
    13. Ni, Yingzhao & Ding, Wenjie & Li, Donghui & Xing, Lu, 2024. "Internal information asymmetry and power distance," Research in International Business and Finance, Elsevier, vol. 71(C).
    14. Haiyan Jiang & Jing Jia & Larelle (Ellie) Chapple, 2024. "Enterprise risk management and investment efficiency: Australian evidence from risk management committees," Australian Journal of Management, Australian School of Business, vol. 49(3), pages 366-402, August.
    15. Ahrum Choi & Woo‐Jong Lee & Yong Gyu Lee & Gaoguang Zhou, 2023. "Internal Information Quality and Corporate Employment Decisions," Australian Accounting Review, CPA Australia, vol. 33(3), pages 262-283, September.
    16. Roychowdhury, Sugata & Shroff, Nemit & Verdi, Rodrigo S., 2019. "The effects of financial reporting and disclosure on corporate investment: A review," Journal of Accounting and Economics, Elsevier, vol. 68(2).
    17. Binz, Oliver & Ferracuti, Elia & Joos, Peter, 2023. "Investment, inflation, and the role of internal information systems as a transmission channel," Journal of Accounting and Economics, Elsevier, vol. 76(2).

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