Financial reporting quality and corporate investment efficiency: Chinese experience

Abstract

Purpose

The purpose of this paper is to study the relationship between financial reporting quality and investment efficiency in China.

Design/methodology/approach

By analyzing institutional background and hypotheses development, the paper selected listed firms in China to be the study samples. On the base of that, the relationship between financial reporting quality and investment efficiency of the samples were discussed.

Findings

Consistent with this claim, the paper finds proxies for financial reporting quality, namely self‐constructed composite measures, are negatively associated with both under‐ and overinvestment of the listed corporations; of which the effects of accrual quality and earnings smoothness on under‐ and overinvestment are most significant.

Research limitations/implications

Overall, this paper has implications for research examining the determinants of investment efficiency and the economic consequences of enhanced financial reporting.

Practical implications

This paper seeks to develop Chinese economic infrastructure into an economically efficient system of public financial reporting and disclosure in order to improve accounting information's role of allocating capital.

Originality/value

The conclusion of this paper might be the first empirical evidence to support prior research that financial reporting quality is positively related to investment efficiency for large, US publicly traded firms, thus the findings extend to public firms in emerging markets.

Citation

Li, Q. and Wang, T. (2010), "Financial reporting quality and corporate investment efficiency: Chinese experience", Nankai Business Review International, Vol. 1 No. 2, pp. 197-213. https://doi.org/10.1108/20408741011052591