How Does Financial Reporting Quality Relate to Investment Efficiency?
Gary C. Biddle
The University of Hong Kong - School of Economics and Finance
Georgetown University - Department of Accounting and Business Law
Rodrigo S. Verdi
Massachusetts Institute of Technology (MIT)
Journal of Accounting & Economics (JAE), December 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.
Number of Pages in PDF File: 49
Keywords: Financial Reporting Quality, Investment Efficiency, Accounting Quality, Adverse Selection, Moral Hazard
JEL Classification: G30, G31, M41, M43, D82
Date posted: December 1, 2010 ; Last revised: September 21, 2015