49 Pages Posted: 1 Dec 2010 Last revised: 21 Sep 2015
Date Written: July 2009
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: 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
By Ray Ball