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How Does Financial Reporting Quality Relate to Investment Efficiency?

49 Pages Posted: 1 Dec 2010 Last revised: 21 Sep 2015

Gary C. Biddle

University of Melbourne, Department of Accounting, Faculty of Business and Economics

Gilles Hilary

Georgetown University - Department of Accounting and Business Law

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT)

Date Written: July 2009

Abstract

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 macroeconomic 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 investment.

Keywords: Financial Reporting Quality, Investment Efficiency, Accounting Quality, Adverse Selection, Moral Hazard

JEL Classification: G30, G31, M41, M43, D82

Suggested Citation

Biddle, Gary C. and Hilary, Gilles and Verdi, Rodrigo S., How Does Financial Reporting Quality Relate to Investment Efficiency? (July 2009). Journal of Accounting & Economics (JAE), December 2009. Available at SSRN: https://ssrn.com/abstract=1146536 or http://dx.doi.org/10.2139/ssrn.1146536

Gary C. Biddle (Contact Author)

University of Melbourne, Department of Accounting, Faculty of Business and Economics ( email )

Level 7, 198 Berkeley Street
Carlton, VIC 3010
Melbourne, Victoria 3010
Australia
61-3-8344-9807 (Phone)
61-3-9349-2397 (Fax)

Gilles Hilary

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
100 Main Street E62-666
Cambridge, MA 02142
United States
(617) 253 2956 (Phone)

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