Impact of Financial Reporting Quality on Investment Inefficiency

Abstract

Accounting system today plays significant role in activity flow of the organizations and has important task in the economic environment of the countries. Financial reporting is one of the main products of accounting system, goals of which include providing information necessary for economic decision making by the users regarding evaluation of the performance and profitability capacity of the economic institution. Perquisite to achieve this goal is measurement and provision of information in such a way that allows evaluation of the past performance and helps measurement of the profitability capacity and prediction of future activities of economic institution. Current research study was conducted aiming at investigating relationship between financial reporting quality and investment inefficiency. Research statistical population includes all companies listed in Tehran Stock Exchange during 2007 to 2012. Given specified criteria, 112 companies were selected as statistical sample. Multi-variate regression, fixed effects model and generalized least squares estimation method were used for data analysis using Eviews software. Several control variables including growth, return on assets, cash balance, and assets tangibility were used in this regression model. In order to calculate and measure financial reporting quality and investment inefficient, models proposed by McNichols and Stubben (2008) and Biddle et al. (2009) were used respectively. Analysis results indicate inverse significant relationship between financial reporting quality and investment inefficient.