In a standard financial economics model of asset pricing and value-maximizing firms, we show that better public information about firm-specific and economy-wide events affects the allocation of capital investments among firms and over time. The consequences for capital market outcomes, such as risk, risk premia, interest rates, firm prices, and the cost of capital, depend on investor preferences and whether improvements are to firm-specific or economy-wide information. We show that interest rates and risk premia tend to move in opposite directions and that the effects on interest rates often dominate the effects on risk premia in determining firm values and the cost of capital.

Both soft, noncontractible, and hard, contractible, information are informative about managerial ability and future firm performance. If a manager's future compensation depends on expectations of ability or future performance, then the manager has implicit incentives to affect the information. We examine the real incentive effects of soft information in a dynamic agency with limited commitment. When long‐term contracts are renegotiated, the rewards for future performance inherent in long‐term contracts allow the principal partial control over the implicit incentives. This is because the soft information affects the basis for contract renegotiation. With short‐term contracts, the principal has no control over the basis for contract negotiation, and thus long‐term contracts generally dominate short‐term contracts. With long‐term contracts, the principal's control over implicit incentives is characterized in terms of effective contracting on an implicit aggregation of the soft information that arises from predicting (forming expectations of) future performance. We provide sufficient conditions for soft information to have no real incentive effects. In general, implicit incentives not controllable by the principal include fixed effects, such as career concerns driven by labor markets external to the agency. When controllable incentives span the fixed effects of career concerns, the latter have no real effects with regard to total managerial incentives—they would optimally be the same with or without career concerns. Our analysis suggests empirical tests for estimating career concerns that should explicitly incorporate noncontractible information.