Skepticism without scrutiny: Verification and information manipulation

Abstract

An investment boom can coexist with investor skepticism about the claims supporting individual projects. We study investors who can identify an interested insider behind a public report before exercising a risky investment option. Verification improves the investor’s decision and deters manipulation by reducing the capital attracted by a false favorable report. Verification informs privately but disciplines publicly. Investors capture the first benefit but ignore the second, so the market verifies too little. Manipulation raises the private value of verification, making verification choices strategic substitutes and equilibrium unique. With intermediate common costs, scrutiny vanishes and manipulated reports direct capital to bad projects under Bayesian beliefs. Rational skepticism can sustain collective misinvestment when credibility is a public good.