Relationship between Financial Reporting Transparency and Investment Efficiency: Evidence from Iran

Authors: Bita Mashayekhi, Hamid Kalhornia

Abstract:

One of the most important roles of financial reporting is improving the firms’ investment decisions; however, there is not much supporting evidence for this claim in emerging markets like Iran. In this study, the effect of financial reporting transparency in investment efficiency of Iranian firms has been investigated. In order to do this, 336 listed companies on Tehran Stock Exchange (TSE) has been selected for time period 2012 to 2015 as research sample. For testing our main hypothesis, we classified sample firms into two groups based on their deviation from expected investment: under-investment and over-investment cases. The results indicate that there is positive significant relationship between financial transparency and investment efficiency. In the other words, transparency can mitigate both underinvestment and overinvestment situations.

Keywords: Corporate governance, disclosure, investment decisions, investment efficiency, transparency.

Digital Object Identifier (DOI): doi.org/10.5281/zenodo.1125699

References:

[1] Healy, P., and K. Palepu, 2001. Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics 31 (1-3), 405-440.
[2] Bushman, R., and A. Smith. 2001. Financial accounting information and corporate governance. Journal of Accounting and Economics 31 (1–3): 237–333.
[3] Lambert, R., C. Leuz, and R. E. Verrecchia. 2007. Accounting information, disclosure, and the cost of capital. Journal of Accounting Research 45 (2): 385–420.
[4] Biddle, G., G. Hilary, and R. S. Verdi. 2009. How does financial reporting quality relate to investments efficiency? Journal of Accounting and Economics 48 (2–3): 112–131.
[5] McNichols, M. F., and S. R. Stubben. 2008. Does earnings management affect firms’ investment decisions? The Accounting Review 83 (6): 1571–1603.
[6] Gomariz MFC and Ballista JPC (2014). Financial reporting Quality, Debt Maturity and Investment Efficiency, Journal of Banking & Finance 40 494-506.
[7] Mashaykhi, M, Faraji, O, and Arash Tahriri. Accounting Disclosure, Value Relevance and Firm Life Cycle: Evidence from Iran. International Journal of Economic Behavior and Organization. Vol. 1, No. 6, 2013, pp. 69-77. doi: 10.11648/j.ijebo.20130106.
[8] Li, Q., Wang, T. (2010). Financial reporting quality and corporate investment efficiency: Chinese experience. Nankai Business Review International, 1 (2): 197-213.
[9] Beatty, Anne, W. Scott Liao, and Joseph Weber. “The Effect of Private Information and Monitoring on the Role of Accounting Quality in Investment Decisions*.” Contemporary Accounting Research 27.1 (2010): 17–47.
[10] Jensen, M. 1986. Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review 76 (2): 323–329.
[11] Amihud, Y. and H. Mendelson, 1986. Asset pricing and the bid-ask spread, Journal of Financial Economics 17, 223-249.
[12] Diamond, D. W., and R. E. Verrecchia. 1991. Disclosure, liquidity, and the cost of capital. Journal of Finance 46 (4): 1325–1359.
[13] Easley, D., and M. O’Hara. 2004. Information and the cost of capital. Journal of Finance 59 (4): 1553–1583.
[14] Chen, F., Hope, O.K., Li, Q., Wang, X. 2011. Financial Reporting Quality and Investment Efficiency of Private Firms in Emerging Markets. The Accounting Review, 86 (4): 1255–1288.
[15] Dechow, P. M., R. G. Sloan, and A. . Sweeney. 1995. Detecting Earnings Management. The Accounting Review 70 (2): 19 (2): 193-225
[16] World Bank. 2007. Review of Small Business Activities. World Bank Report. Washington, D.C.: World Bank.