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Information Acquisition Costs and Misreporting: Evidence from the Implementation of EDGAR.

I study the causal effect of investors’ costs in acquiring corporate filings on misreporting. Lower information acquisition costs potentially deter misreporting through enhanced monitoring. However, the other channel is that managers may be more inclined to misreport anticipating that more investors use accounting information in valuing stocks. I study this empirical question with plausibly exogenous variations in investors’ information acquisition costs using the U.S. firms’ staggered transition from paper filings of periodic reports to electronic filings on the EDGAR system from 1993 to 1996. I find that lower information acquisition costs lead to an increase in accrual-based and real earnings management: discretionary accruals go up by 1 to 1.5% of lagged total assets and abnormal production costs go up by 1% of lagged total assets. My results highlight an unintended consequence of EDGAR and also the importance of having a wholistic understanding of managers’ incentives. JEL Codes: M41, M48, D83 , O33