The Real Costs of Financial Efficiency When Some Information Is Soft

The Real Costs of Financial Efficiency When Some Information Is Soft

Alex Edmans, Mirko Heinle, Chong Huang

Series number :

Serial Number: 

Date posted :

September 01 2013

Last revised :

October 22 2018
SSRN Share


  • Disclosure • 
  • managerial myopia • 
  • investment • 
  • financial and real efficiency • 
  • costof capital

This paper shows that improving financial efficiency may reduce real efficiency. While the former depends on the total amount of information available, the latter depends on the relative amounts of hard and soft information. Disclosing more hard information (e.g. earnings) increases total information, raising financial efficiency and reducing the cost of capital.

However, it induces the manager to prioritize hard information over soft by cutting intangible investment to boost earnings, lowering real efficiency. The optimal level of financial efficiency is non-monotonic in investment opportunities. Even if low financial efficiency is desirable to induce investment, the manager may be unable to commit to it. Optimal government policy may involve upper, not lower, bounds on financial efficiency.

Published in

Published in: 
Publication Title: 
Review of Finance
Volume 20, Issue 6, October 2016, Pages 2151–2182
Saturday, October 1, 2016


Real name:
Mirko Heinle
Real name:
Chong Huang