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

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