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The Effects of Information Differences Among Investors on the Role of Earnings Quality in Facilitating Corporate Investment

We examine whether the presence of privately informed traders, and information asymmetries between these traders and the rest of investors, undermine the role of accounting information in mitigating financing constraints and reducing under-investment problems. In line with prior research, we show that among firms prone to under-investment, those with better quality earnings invest more. We also show that this relation disappears whenever trading by informed investors generates additional information asymmetries that managers cannot reduce through improved accounting information.