“Financial Leverage, Information Quality, and Efficiency” – by Dr. Lin Nan
Accounting & Law Seminar
Dr. Lin Nan
Associate Professor of Accounting
Krannert School of Management
In this paper, we examine both information quality and financial leverage in a setting in which an entrepreneur is in need for external financing to undertake a project, and the entrepreneur’s effort input affects the outcome of the project. We find that when the financial leverage is in an intermediate range, overall efficiency may decrease in information quality, because higher information quality discourages the entrepreneur from working hard. We also find that overall efficiency is very sensitive to financial leverage if information quality is poor; while when information quality is higher, overall efficiency is less sensitive to leverage. Our results further indicate that when facing high uncertainty regarding leverage, the entrepreneur prefers high information quality..