financial reporting quality and investment efficiency
TRANSCRIPT
TITLE
How Does Financial Reporting Quality Relate to Investment Efficiency?
Authors
1. Gary C. Biddle (The University of Hong [email protected]).
2. Gilles Hilary (HEC Paris [email protected]).
3. Rodrigo S. Verdi (MIT Sloan School [email protected]).
Publish Year
July 2009 Country Name
Purpose
How Does Financial Reporting Quality Improve Investment Efficiency?” by Biddle and Hilary…
Terms To know
Financial Reporting Quality Investment Efficiency
Financial Reporting Quality
IF Financial Information present true and fair picture of a company it means Financial Reporting Quality is High and Vice Versa…
Investment Efficiency
If the Firm would invest in Positive NPV And Would not invest in negative NPV it is called the Investment Efficiency of the firm……
Theory
Agency Theory1. Managers are Rational2. Alignment view(AP1)3. Intrenchment view(AP2)
Findings Three key findings.1. First, we find that higher reporting quality is
associated with both lower over- and under-investment.
2. Second, firms with higher reporting quality are less likely to deviate from their predicted level of investment when modeled at the firm level.
3. Third, reporting quality is negatively related to investment when aggregate investment is high and positively related when aggregate investment is low.
ReasonsHigher financial reporting quality can improve
investment efficiency by reducing information asymmetries that give rise to frictions such as moral hazard and adverse selection.
Lower asymmetric gap reduces Adverse selection ,Moral Hazard.
How over Investment Reduced Better FRQ & lower Asymmetric Gap would enhance
the better choices of investor to choose better investment.
Manager with Positive NPV investment would able to generate Finances & Manager with Negative project would not able to generate finances.
Therefore according to Adverse selection Model Higher FRQ reduces the over & under investment problem.
How under investment reduced
Higher FRQ would reduce the Moral Hazard Problem.
As Higher FRQ would able investor to monitor the manager more efficiently therefore higher monitoring ability of investor due to HFRQ would reduce the over & under investment problem.
ConclusionFRQ enhance the investment efficiency of a
firm by lowering the asymmetric information to reducing Adverse Selection & Moral hazard.