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How does financial reporting quality relate to investment efficiency?

  • Biddle, Gary C.
  • Hilary, Gilles
  • Verdi, Rodrigo S.

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.

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File URL: http://www.sciencedirect.com/science/article/B6V87-4X8J66G-3/2/56b003f0dfeee4b37d54d8164a451fa9
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Article provided by Elsevier in its journal Journal of Accounting and Economics.

Volume (Year): 48 (2009)
Issue (Month): 2-3 (December)
Pages: 112-131

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Handle: RePEc:eee:jaecon:v:48:y:2009:i:2-3:p:112-131
Contact details of provider: Web page: http://www.elsevier.com/locate/jae

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