An Investigation Of The Relation Between Non-Financial Information And Firm Investment Efficiency

A lot of studies have examined the deviation of corporate real investments from the optimal level. In particular, the issue of whether and how financial information can affect investment efficiency has been widely discussed and debated since Bushman and Smith (2001). In theory, high quality financial information, by mitigating information asymmetry and reducing agency costs, can help enhance the efficiency of capital market, reduce the impact of all kinds of "noise" on investment efficiency, and restrain firms’sub-optimal investment behavior, thereby improving investment efficiency. A number of empirical evidence demonstrates that quality of financial information will certainly contribute to improving investment efficiency and increasing firm value. However, with the growing demand from investors on the knowledge of corporate information, financial information as an’image reflection’ just reveals a profile of the corporate operation history. Due to the constraints resulted from accounting recognition and measurement, a lot of important information could not be passed to investors for reference in their investment decision-making process. Thus, it is widely agreed by both academic and practical circles, as well as governments and organizations, that listed frms are encouraged to voluntarily disclose more non-financial information, especially the information of firm’s perspective on future development, in order to enhance the usefulness of financial reporting. Such non-financial information is superior to financial information in terms of relevance and timeliness. However, it is difficult to immediately audit or to confirm its authenticity. In the circumstances, does non-financial information affect investors’ decision-making process and subsequently the investment efficiency? Starting from the motivation of firms’voluntary disclosure and considering the special institutional settings of China as an emerging market, the influence of non-financial information concerning the prospective of firms’future development voluntarily disclosed on the investment efficiency, the influential mechanism and developing trend have been discussed in this thesis, using the method of theoretical analysis and empirical testing. Whether this effect has the characteristics of ’state-dependency’has been further investigated.This thesis consists of six chapters. The first chapter is introduction, briefly introducing the motivation, implication, idea, framework, methodology and technical map of this research. The second chapter is literature review, including the relevant literature on investment efficiency and voluntary disclosure of non-financial information. Given the literature gap and unique institutional setting of China as an emerging market, this chapter further elaborates the direction of the research. Chapter three:on the basis of the motivation of voluntary disclosure of non-financial information in listed firms, the relation between non-financial information and investment efficiency, the inherent mechanism as well as the trend, have been investigated. Chapters four and five:from the perspective of corporate governance and the evaluation on information disclosure of Shenzhen Stock Exchange, whether the influence of non-financial information on the investment efficiency has the characteristics of’state-dependency’ has been examined and provided with relevant empirical evidence. Chapter six summarizes the main findings of this research and put forward suggestions on policy making, and pointed out the limitations of this thesis and future research directions.Through theoretical analysis and empirical tests, the following conclusions are reached:Firstly, for the full sample, the non-financial information with low quality which is voluntarily disclosed by listed firms, can also gain the trust from investors, and thus distort the market allocation of resources, making the firms that disclosed more information but of poorer quality obtain more resources. Driven by self-benefits such as establishing a "business empire" and intervened by the government, managers tend to expand the size of the non-efficient investment, which leads to excessive investment. And this research also finds that, although some firms using the excess market resources invest in certain high-yield projects and temporarily relieve the financing stress; at the same time, they tend to tunnel the external financing in the way of capital occupation and enjoy the private benefits of control. Further regression on the yearly subsample reveals that, with the outbreak of a series of false statements case in recent years, as well as the investors’ability being improved, the non-financial information with low quality can no longer gain trust from investors, therefore, difficult to further affect investment efficiency.Secondly, with better corporate governance, the opportunist perspective of managers in disclosing information is suppressed, while the information perspective is reinforced. Thus non-financial information of these companies is of higher quality. However, in the2004-2008subsample, it is not found that high-quality non-financial information enhances its credibility. Compared with others, companies with more comprehensive corporate governance measurements do not significantly ease financing constraints nor gain more market resources. However, in the2009-2010subsample, the non-financial information disclosed by better-governed companies help firms get more trust from investors, and more significantly ease the financing constraint in comparison with other firms. As a result, these companies can avoid the insufficiency in investment, invest in high-yield projects, and thus improve the efficiency of investment.Thirdly, for those firms whose information disclosure is evaluated as excellent or good, regardless of full sample or each time interval subsample, non-financial information is significantly negatively correlated with excessive investment. For those also rated as excellent or good in previous years, the non-financial information tends to better curb excessive investment; however, not statistically significant. This research also finds that the companies of which information disclosure is evaluated as excellent or good, their non-financial information is more credible than other companies. Therefore, it is possible to significantly reduce the financing constraints, help the company gain more market resources and thus avoid investment inefficiency. For companies rated as excellent or good in previous year, their non-financial information disclosed could gain more trust from investors, and the difference has passed the significant test.