How does financial reporting quality relate to investment efficiency?
Author(s)Biddle, Gary C.; Hilary, Gilles; Verdi, Rodrigo
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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 macro-economic 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.
DepartmentSloan School of Management
Journal of Accounting and Economics
Biddle, Gary C., Gilles Hilary, and Rodrigo S. Verdi. “How Does Financial Reporting Quality Relate to Investment Efficiency?.” Journal of Accounting and Economics 48.2-3 (2009) : 112-131. Copyright © 2009, Elsevier
Author's final manuscript