The Dark Side of Reporting Credibility: Evidence from Intangible Investments

This paper documents a new source of myopic investments -- greater reporting credibility. Greater reporting credibility increases investors' response to short-term earnings news, and managers, who are motivated to increase the stock price, have greater incentives to cut intangible investments to improve earnings, even though doing so can damage firms' long-run value. Using a difference-in-differences design, we document that greater reporting credibility can reduce the level and efficiency of intangible investments.