Quality Of Financial Reporting And Investment Decisions

Identifying the factors that influence investment decisions has gained significant attention due to its importance in contributing to firm value and determining firms’ existences.In this sense,the economic impact of accounting information has been at the center of the accounting research question for the last few decades,and the relationship between accounting quality and enterprise investment decisions is a recurring topic of discussion in the accounting literature.However,empirical findings on how and to what extent financial reporting facilitates the allocation of available financial resources to investment projects are inconsistent.Hence,investigating the economic impact and resource allocation role of financial reporting in capital investment decisions,particularly in Africa,is an urgent question that requires an answer.As a result,using African firms as a data set,this dissertation empirically examined the relationship between the quality of financial reporting(FRQ)and investment decisions.In examining the effect of FRQ on investment decisions,this dissertation first investigated the impact of FRQ on investment decisions.Secondly,the current study examined the mechanism through which FRQ affects investment decisions using debt financing as mediating factor.Finally,it investigated how the effect of FRQ on firms’ investment decisions is conditional on the managerial ability of the firms.This study used panel data of 701sample firms from 14 African countries over 2007-2019 as a data set to test the formulated hypotheses.Fixed-effect regression is employed to test the direct nexus between the FRQ and investment decisions and the moderating effect of managerial ability on this relationship.However,structural equation modeling(SEM)was utilized to investigate the mediating effect of debt financing in the relationship between FRQ and investment decisions.A dynamic system generalized method of moments(GMM)is also employed as an alternative estimation technique for robustness checks and potential endogeneity issues.The study revealed a positive relationship between FRQ and investment decisions.Specifically,the empirical result proved that FRQ positively impacts investment level and efficiency.However,it has a negative association with overinvestment and underinvestment.In further analysis,the quality of financial reporting-investment level nexus is more substantial for financially unconstrained firms than constrained firms.However,the FRQ effect on investment efficiency is stronger for constrained firms than unconstrained ones.The restraining overinvestment role of FRQ is more pronounced for the constrained firm than the unconstrained ones.Similarly,the result suggested that the underinvestment mitigation role of FRQ is more noticeable with constrained firms than unconstrained ones.Furthermore,the dissertation exposed that debt financing mediates the FRQ-investment decisions nexus.In particular,the study evidenced that debt financing partially mediates the effect of FRQ on investment level,indicating that financial reporting quality improves investment level by facilitating debt financing.Similarly,the result confirmed that the positive association between FRQ and investment efficiency is mediated by debt financing.The finding also revealed that debt financing mediates the link between FRQ and inefficient investment scenarios.The evidence indicated that FRQ negatively affects overinvestment and underinvestment through partial mediation of debt financing.The results are consistent with the notion that higher quality of financial reports facilitates debt financing,which improves investment decisions.Finally,the findings indicated a strong correlation between FRQ and investment level for firms with high managerial ability.Similarly,the study demonstrated that the FRQ-investment efficiency nexus is more pronounced for firms with higher managerial capability than those with lower ones.In further,the study found that managerial ability enhances the power of FRQ in mitigating over-and underinvestment by amplifying the negative effect of FRQ on over-and under-investment.These shreds of evidence shed light on the notion that an enterprise’s top managers’ ability determines the direct link between financial reporting and investment decisions.The study has theoretical and practical implications.From a theoretical perspective,the results support the validity and greater understanding of agency,signaling,pecking order,and upper echelon theories in explaining the empirical relation of financial reporting and investment decisions.In addition,the results also contribute to the existing literature by providing a piece of empirical evidence,which is a breakthrough in breaking the boundary of earlier studies that concluded the value relevance of financial reporting has non-existence where legal,regulatory,and credit protection is weak.From the practical aspect,this dissertation provides valuable multidimensional insights for firms,financial reporting regulators,and policymakers to enact policies and standards that enhance FRQ to enable firms to access the funds,thereby improving investments decision.And the result provided the ground of understanding that a firm’s human capital,mainly top management,decisively determines the quality of financial reports and investment decisions.Thus,firms are more likely to encourage competent top management to make efficient investment decisions.