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Earnings Quality and Investment Efficiency: Evidence from Eastern Europe

Author

Listed:
  • Cherkasova Victoria

    ()

  • Rasadi Daryush

    () (National Research University Higher School of Economics (NRU HSE), Faculty of Economic Sciences, Department of Finance, 26 Shabolovka St. Building 3, 119049 Moscow, Russian Federation)

Abstract

This study explores the firm-level relationship between earnings quality and investment efficiency. Higher quality of reported results has the capacity to positively impact the efficiency of company’s investment levels by over- and underinvestment reduction. The research is carried out on the sample of 7546 companies from Eastern Europe for the period 2010-2015. Eastern European countries have a unique institutional and business environment that is relevant to the purpose of this paper. We divide the sample into 2 fundamentally different economic sectors - industrial and retail - and test the significance of each factor in the main relationship. We also examine the factor of the firm’s ownership form by comparing earnings quality with investment efficiency values between public and private companies. Our main results show that a higher earnings quality mitigates both overinvestment and underinvestment issues. The relationship between earnings quality and underinvestment turns out to be stronger in the industrial sector. As for the comparison of public and private firms, public companies on average demonstrate a higher earnings quality and lower overinvestment issues.

Suggested Citation

  • Cherkasova Victoria & Rasadi Daryush, 2017. "Earnings Quality and Investment Efficiency: Evidence from Eastern Europe," Review of Economic Perspectives, Sciendo, vol. 17(4), pages 441-468, December.
  • Handle: RePEc:vrs:reoecp:v:17:y:2017:i:4:p:441-468:n:6
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