How does financial reporting quality relate to investments efficiency?

G. HILARY, R. Verdi, G. Biddle

Journal of Accounting and Economics

décembre 2009, vol. 48, n°2/3, pp.112-131

Départements : Comptabilité et Contrôle de Gestion

Prior evidence that higher-quality financial reporting improves capital investment efficiency leaves unaddressed whether it reduces over- or under-investment. This study provides evidence of both in documenting a conditional negative (positive) association between financial reporting quality and investment for firms operating in settings more prone to over-investment (under-investment). Firms with higher financial reporting quality also are found to deviate less from predicted investment levels and show less sensitivity to macro-economic conditions. These results suggest that one mechanism linking reporting quality and investment efficiency is a reduction of frictions such as moral hazard and adverse selection that hamper efficient investmentFinancial reporting quality; Capital investment