Do improvements in the information environment affect real investment decisions?

Abstract

We examine how changes in the information environment can affect real investment decisions. Using the events surrounding mandatory adoption of IFRS as exogenous shocks in information asymmetry, we find a significant increase in firms’ investment-to-price sensitivity following IFRS adoption that persists for years after the adoption. These results are in line with the learning hypothesis and suggest that the improvements in the information environment lead to stock prices that are more informative, which enhances managers’ reliance on stock prices in making investment and other decisions. We document that this increase in investment-to-stock price sensitivity is stronger for firms in countries with weaker exante institutional and accounting quality as well as for firms that experience a larger improvement in stock price informativeness. Finally, we also show that higher investment-to-stock-price sensitivity is associated with improvements in performance.