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Financial Reporting Quality and Investment Efficiency of Private Firms in Emerging Markets


Feng Chen


University of Toronto - Rotman School of Management

Ole-Kristian Hope


University of Toronto - Rotman School of Management

Qingyuan Li


Wuhan University - School of Economics and Management

Xin Wang


University of Hong Kong - School of Business

December 9, 2010

Accounting Review, Forthcoming

Abstract:     
Prior research shows that financial reporting quality (FRQ) is positively related to investment efficiency for large U.S. publicly traded companies. We examine the role of FRQ in private firms from emerging markets, a setting in which extant research suggests that FRQ would be less conducive to the mitigation of investment inefficiencies. Earlier studies show that private firms have lower FRQ, presumably because of lower market demand for public information. Prior research also shows that FRQ is lower in countries with low investor protection, bank-oriented financial systems, and stronger conformity between tax and financial reporting rules. Using firm-level data from the World Bank, our empirical evidence suggests that FRQ positively affects investment efficiency. We further find that the relation between FRQ and investment efficiency is increasing in bank financing and decreasing in incentives to minimize earnings for tax purposes. Such a connection between tax-minimization incentives and the informational role of earnings has often been asserted in the literature. We provide explicit evidence in this regard.

Number of Pages in PDF File: 55

Keywords: Investment Efficiency, Under- and Overinvestment, Financial Reporting Quality, Private Firms, Emerging Markets, Financing Sources, Tax Incentives

JEL Classification: M41, F30, G30, G31, M10

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Date posted: December 11, 2010  

Suggested Citation

Chen, Feng and Hope, Ole-Kristian and Li, Qingyuan and Wang, Xin, Financial Reporting Quality and Investment Efficiency of Private Firms in Emerging Markets (December 9, 2010). Accounting Review, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1722804

Contact Information

Feng Chen
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6
Canada

Ole-Kristian Hope (Contact Author)
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6
Canada
HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx
Qingyuan Li
Wuhan University - School of Economics and Management ( email )
Wu Han, Hu-Bai 430072
China
Xin Wang
University of Hong Kong - School of Business ( email )
Meng Wah Complex
Pokfulam Road
Hong Kong
Hong Kong
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