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The influence of financial reporting quality and audit quality on investment efficiency

Author

Listed:
  • Faisal Shahzad
  • Ijaz Ur Rehman
  • Waqas Hanif
  • Ghazanfar Ali Asim
  • Mushahid Hussain Baig
Abstract
Purpose - This study aims to empirically investigate the effect of financial reporting quality (FRQ) and audit quality (AQ) on the investment efficiency (IE) for the firms listed on the Pakistan Stock Exchange during the period 2007-2014. Design/methodology - The authors use pooled ordinary least squares (OLS) regression which cluster at the firm and year level to test the hypotheses. For sensitivity check, the authors also account for reverse causality and cross-sectional dependence by using the GMM and FGLS regression methods. Furthermore, the authors built their theoretical arguments based on alignment hypothesis of the agency theory and resource-based view of the firm. Findings - The findings suggest that higher FRQ and AQ are associated with higher IE. The results for these particular estimates are robust when tested using alternative estimation techniques. Overall, the outcomes of this study are in line with the arguments presented by the alignment hypothesis of theagency theoryandresource-based viewof the firm. Practical implications - This study is fruitful for policymakers’ and investors. This study finds that the audit done by the Big 4 also reduces the information gap and, thus, reduces the moral hazard and adverse selection problems, thereby enhancing the IE. Originality - The authors extend the debate on determinates of IE and highlight two monitoring mechanisms: FRQ and AQ. The authors further extend the literature on the economic consequences of AQ in terms of IE, as proposed byFrancis (2011). For the first time, this study investigates the impact of AQ on IE in a setting where minority shareholder risk of exploitation is high relative to other markets in Asia.

Suggested Citation

  • Faisal Shahzad & Ijaz Ur Rehman & Waqas Hanif & Ghazanfar Ali Asim & Mushahid Hussain Baig, 2019. "The influence of financial reporting quality and audit quality on investment efficiency," International Journal of Accounting & Information Management, Emerald Group Publishing Limited, vol. 27(4), pages 600-614, October.
    • Handle: RePEc:eme:ijaimp:ijaim-08-2018-0097
    DOI: 10.1108/IJAIM-08-2018-0097
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    Citations

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    Cited by:

    1. Sawarni, Kumar Sanjay & Narayanasamy, Sivasankaran & Padhan, Purna Chandra, 2023. "Impact of earnings management on working capital management efficiency," Finance Research Letters, Elsevier, vol. 54(C).
    2. Poursoleyman, Ehsan & Mansourfar, Gholamreza & Rezaee, Zabihollah & Homayoun, Saeid, 2024. "Corporate social responsibility and investment efficiency: The roles of national stakeholder orientation and legal origins," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 889-911.
    3. Susi Susilawati & Titik Aryati & Vinola Herawaty, 2024. "Financial Reporting Quality, ESG and Prosperity Disclosure, and Investment Efficiency: The Role of Information Asymmetry (Moral Hazard Friction)," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 7, pages 142-160.

    More about this item

    Keywords

    Emerging markets; Investment efficiency; Financial reporting quality; Audit quality; G31; M42;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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