Financial Reporting Quality and Investment Efficiency: The Role of Strategic Alliances

53 Pages Posted: 17 Mar 2022

See all articles by Huichi Huang

Huichi Huang

Oregon State University - College of Business

Nir Yehuda

University of Delaware - Accounting & MIS

David Weinbaum

Syracuse University

Date Written: February 1, 2019

Abstract

We study firms that engage in strategic alliances, and investigate the link between a firm’s investment and the accounting quality of its partners. Given the view of the firm as a nexus of contractual relationships, we expect that alliance partner information will help investors monitor the firm. In line with this expectation, we show that partner firms’ accounting quality reduces both over- and underinvestment in the focal firm. We also test the role of partner firms’ accounting quality in multisegment firms, in which agency conflicts are more acute. We find that the accounting quality of partner firms reduces the diversification discount in these firms. Finally, we explore the link between the firm’s investment and its own accounting quality for firms that have engaged in alliances and firms that have not. For firms that form alliances, we expect the information provided by other members of the nexus to complement the focal firm’s disclosures, increasing the usefulness of its own accounting quality. Our findings confirm this prediction.

Keywords: Accounting Quality; Alliances; Investment

JEL Classification: M41; L14; L22; L24

Suggested Citation

Huang, Huichi and Yehuda, Nir and Weinbaum, David, Financial Reporting Quality and Investment Efficiency: The Role of Strategic Alliances (February 1, 2019). Available at SSRN: https://ssrn.com/abstract=4038827 or http://dx.doi.org/10.2139/ssrn.4038827

Huichi Huang

Oregon State University - College of Business ( email )

224D Bexell Hall
Corvallis, OR 97331
United States

Nir Yehuda (Contact Author)

University of Delaware - Accounting & MIS ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

HOME PAGE: http://https://lerner.udel.edu/faculty-staff-directory/nir-yehuda/

David Weinbaum

Syracuse University ( email )

Syracuse, NY
United States

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