The effect of overvaluation on investment and accruals: The role of information

• A good information environment (IE) helps deter the overvaluation effect.
• The effects on accrual and on investment are weak for firms in a good IE.
• The effects are positive for firms with a poor IE.
• S&P inclusion and the Big Eight auditors have a stronger effect in deterring the effects.
• Regardless of the IE, strong negative misvaluation-shareholding relation exists.

This paper examines whether the effect of overvaluation on accrual and investment is weak in a good information environment using the naive manager hypothesis and the monitoring hypothesis. The results show that CEOs recognize overvaluation and reduce their shareholdings regardless of the extent of the information environment and the naive manager hypothesis is not supported. However, managers in a good information environment do not respond to overvaluation with accrual or investment, and more institutional investors help to reduce overvaluation-driven behaviors. Thus, the monitoring hypothesis is supported. These findings are free from causality concerns and robust for alternative measures of misvaluation.