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Abstract

Borrowers' reputation concerns makes communication of soft or non-verifiable information credible. We find that some misreporting of short-term information has costs as well as benefits. The costs are due to inefficient management of investments, while the benefits are due to the fact that some short-term misreporting facilitates signaling of a firm's long-term prospects. We discuss how monitoring of an ongoing project may deprive a firm of using its communication strategy to signal long-term prospects.

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... Cable would therefore predict higher debt among firms with more outsiders on their boards at any given level of profitability, matching at least some of Güner et al.'s findings. Choi et al. (2008) find that venture capitalists may be better off without monitoring, due to a dynamic incentive problem. Gautier and Paolini (2007) reach similar conclusions in a strategic delegation setting. ...
... The benefits that outsiders provide are those of strategically delegating to a less-informed party. As noted in Section 4, a related result appears in Gautier and Paolini (2007) and Choi et al. (2008), where a principal delegates to a better-informed party with misaligned incentives. The results there are similar to ours, in finding that delegation to the betterinformed party leads to more value creation; the credit markets in our setting create the incentive for delegation to less-informed parties. ...
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... 1 Soft information "includes less certain information known to an issuer, such as projections and other forward-looking information" (SEC Commissioner R.Y. Roberts 1994). More generally, we define soft information as information that cannot be verified and, thus, cannot be used in a contract between two parties (i.e., the information is non-contractible). 2 This definition covers such diverse examples as information on sales forecasts, the progress of an investment project (Choi, Kristiansen and Nahm 2007), management reputation (Stocken and Verrecchia 1999), and the closeness of the relation between a firm and its bank (Liberti 2003). ...
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  • N Bergstrasser
  • T Philippon
Bergstrasser, N. and Philippon, T. (2006), CEO incentives and earnings management, Journal of Financial Economics, 80, 511—529.
  • P Newman
  • R Sansing
Newman, P. and Sansing, R. (1993), Disclosure policies with multiple users, Journal of Accounting Research, 31, 92—112.