Financial Reporting Quality, Capital Allocation Efficiency, and Financing Structure: An International Study

35 Pages Posted: 1 Oct 2005

Date Written: November 29, 2005

Abstract

I examine the relation between financial reporting quality and capital allocation efficiency across twenty-three countries. Previous literature points out that outside shareholders reduce information asymmetry by requiring extensive financial reporting, while insiders, such as banks, more frequently use private communication channels. I hypothesize that high quality financial reporting improves capital allocation decisions, but its usefulness increases (declines) with equity (bank) financing. I find that a country's legal, political and economical infrastructure improves the country's capital allocation efficiency. Financial reporting quality beyond the level associated with a country's infrastructure improves capital allocation efficiency for industries more dependent on equity financing. My findings are consistent with a heterogeneous demand for financial accounting information. Outside shareholders are more dependent on financial reporting to reduce information asymmetry than are banks. Adopting better financial reporting standards will be more beneficial to industries dependent on equity financing.

Keywords: international accounting, capital allocation efficiency, financing structure

Suggested Citation

Sun, Kevin Jialin, Financial Reporting Quality, Capital Allocation Efficiency, and Financing Structure: An International Study (November 29, 2005). AAA 2006 Financial Accounting and Reporting Section (FARS) Meeting Paper, Available at SSRN: https://ssrn.com/abstract=816384 or http://dx.doi.org/10.2139/ssrn.816384

Kevin Jialin Sun (Contact Author)

St. John's University ( email )

8000 Utopia Parkway
Queens, NY 11439
United States

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