Investment, Inflation, and the Role of Internal Information Systems as a Transmission Channel
We examine whether the quality of firms’ internal information systems influences the relation between inflation shocks and corporate investment, as posited by imperfect information models. We first document a positive relation between inflation shocks and investment, consistent with nominal rigidity breaking the classical dichotomy, i.e., the prediction that nominal variables, such as inflation, do not affect real variables, such as corporate investment. Next, we use responses to the World Management Survey to directly measure firms’ internal information system quality and find that higher internal information system quality mitigates the positive relation between inflation shocks and investment. This result suggests that internal accounting quality serves as a transmission channel through which aggregate nominal variables affect real variables at the firm level. Our findings are robust to using import competition, inheritance tax levels, education levels and the 8 th EU Company Law Directive as instruments for internal information quality.