Abstract:
This study examines the financial reporting quality (FRQ) and investment efficiency. It addresses the research gap concerning the exploration of FRQ-investment efficiency relationship across developed, emerging, frontier, and other markets, and the role of country-level investor protection, financial constraints, and managerial risk-taking play in shaping this relationship. Available accounting data from 1998 to 2022 in forty-one (41) industries in thirty-six (36) countries was collected for 21,741 publicly listed firms around the globe, having 166,453 firm-year observations. The causal relationships are tested using fixed-effect regression analysis. For robustness checks, this study used alternative measures of FRQ and investment efficiency; performed split-sample tests by excluding firms with the highest firm-year observations; bifurcated firms into under- and over-investment groups; and used the instrumental variable approach to address endogeneity. Findings reveal that FRQ positively impacts investment efficiency across all market types, with stronger effects under higher investor protection, greater financial constraints, and lower managerial risk-taking. The influence of these factors is significant in both over- and under-investment scenarios. These findings add to the existing evidence that, apart from other factors that impact the relationship of FRQ with investment efficiency, better country-level investor protection, more financial constraints faced by firms, and less managerial risk-taking play a complementary role in the stated relationship. These findings enrich the landscape of investment efficiency literature and underscore that higher FRQ yields a significant positive impact on investment efficiency, extending this observation to the transnational landscape of developed, emerging, frontier and other markets. This study
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adds to the burgeoning research on the connection between FRQ and investment efficiency in publicly listed firms, particularly highlighting the factors that accentuate the strength of these outcomes which are investor protection, financial constraints, and risk-taking. In particular, this study reveals a compelling similarity between its results and those obtained in developed markets: FRQ enhances investment efficiency despite the comparatively lower FRQ in the emerging, frontier, and other markets datasets. Future research may explore these dynamics further, particularly by employing the qualitative characteristics of FRQ measure.
