The Relationship Between Financial Reporting Quality And Investment Efficiency

Financial activities in enterprises are consisting of4parts:fund-raising activities, investment, cost of activities, withdrawal of funds. Between all these activities, investment play the key role in founding a company and allocating resources for production, which is important for the corporation wealth, the shareholders wealth and the growth of the real economy. Investment activities are wild concerned by management theorists and practitioners. The inefficiency investment at the enterprise level would impair the interests of shareholders, the health development of the company, and even the growth of economy. Therefor plenty of papers on inefficient investment has been published, among which principal-agent theory and information asymmetry theory are the theoretical basis of the inefficient investment studies. Scholars discuss the factors that might influence the degree of inefficient investment in principal-agent theory and information asymmetry theory, which focus on the hot issues such as company management, financial regulation and property right structure. In this article, we use and enrich accounting information quality theory to discuss the relationship between financial reporting quality and investment efficiency in the frame work of principal-agent theory and information asymmetry theory. The article also analyze the internal mechanism of high-quality financial reporting govern the inefficient investment of enterprise. The data of manufacturing company is employed to examine relation of financial reporting quality and investment efficiency; accordingly, we can understand the significance of accounting supervision in investment efficiency.In2007, the new Accounting Standards for Business Enterprises is put into effect in China; meanwhile, the system of accounting and the rule of accounting is modified and adjust to international rules. So these questions are raised:whether the Chinese corporation financial reporting is informative? Could the quality of financial reporting affect the overinvestment and the underinvestment in enterprises? To answer these questions, the theme of the article is settled.This research analyzes the quality of financial reporting governance corporate non-efficient investment path, based on the theory of information asymmetry and principal-agent theory. In the capital markets, financial reporting disclosure information would help decision-maker to find good investment opportunities, to mitigate the situation of asymmetric information in shareholders and managers, to constrain the behavior of managers, to ease the asymmetric information ease between corporate shareholders and creditors, and to reduce adverse selection and financing constraints thus to reduce non-efficiency investments. On this basis, the interpretation of the quality of financial reporting, as well as its investment in the relationship with corporate non-efficiency of this article are from three angles of the DD model, the Jones model as well as English smoothness index. Our research selected2340sets of data of Listed Manufacturing Company from2008to2010in analysis of samples; the number of over-investment in the sample is782sets, while the insufficient investment is1557sets. Multiple regression methods is employed to analyze the data.The analysis results show that the quality of financial reports for the mitigation of the over-investment and inadequate investment behavior, but the effect that the quality of the financial reporting exerting on over-investment and under-investment might be different. In listed manufacturing company of China, financial report with high quality would be more effectively when dealing with over-investment behavior. At the same time, this study found that the company’s outstanding shares ratio and largest shareholder rights and corporate governance factors ease the efficiency of the company’s non-investment has a positive effect. The significance of this study reflected in both theoretical and practical aspects: Theoretical aspect:Our research select the meaning of accounting information quality characteristics and the quality of financial reporting as a starting point to examine the quality of the financial reports’effect on enterprises inefficiency investment. We analyze the mechanism that high-quality financial reporting mitigating information asymmetry due to adverse selection proxy conflict governance of non-efficiency investments. We also take advantage of the latest Chinese manufacturing listed company data and carry out an empirical test of the quality of financial reporting for investment efficiency. This paper not only enriches the study of the economic consequences of the quality of financial reporting, but also expands the relationship between the quality of financial reporting and the efficiency of investment research.Reality aspect:China is still in a period of economic structural reform, combined with the capital market to establish a time late in the development of immature, and the market mechanism is not yet fully established. In the context of this reality:SME has financing difficulties, insufficient investment is widespread; some individual industries investment might be oversupply, blindly follow the trend of investment is serious. In this paper, the qualities of financial reporting impact on corporate investment efficiency is discussed, which have positive and practical significance for optimizing corporate investment decisions, therefore the efficiency of investment can be improved.The limitation of this study is mainly reflected in the quality of financial reporting and corporate investment efficiency metric. This article select the DD model and Jones model calculations accrual quality and earnings smoothness index as alternative variable quality of financial reporting, but the above three alternative variables can only be measured at the level of earnings quality and other aspects of financial reporting, such as asset, liabilities, and disclosure of information, so there’re some other factors not involved, which may cause the above-mentioned variables may not fully reflect the level of quality of corporate financial reporting. At the same time, this article is not from the view of the input-output directly measure the efficiency of business investment, instead of using the Richardson model’s residuals alternative variables as a corporate investment efficiency, all listed lack of over-investment and investment company is divided into two categories. This classification may lead to biased sample classification, then to affect the regression results.Chapters of this paper are organized as follows:The first part is an Introduction to the Study, introduces the research background, research framework and research significance. Research background includes theory and reality, summed up the basic research of scholars on the efficiency of enterprises to invest in the quality of financial reporting, as well as the relationship between the two, and analyzed the quality of financial reporting and corporate investment in China’s real context the urgency of the efficiency of the relationship. The research significance includes both theoretical part and practical part, in order to reveal the value of this study.The second part is the literature review. Summarizes the research at home and abroad, mainly from the three aspects of the quality of financial reporting, investment efficiency, as well as the relationship between the two, the focus summarized and commented measure of the quality of financial reporting and corporate investment efficiency. This section summarizes and research about the quality of financial reporting and corporate investment efficiency, review current research to point out the limitations and shortcomings, as well as improvements to provide a guideline for the determination of this research method.The third part is the theoretical basis. Asymmetric information theory and principal-agent theory is selected as the theoretical basis. Elaboration on the reason of non-efficiency investments is reasoned. The qualities of financial reporting relieve the internal mechanism of corporate non-efficiency investments. The hypothesis of the article is formed from the above. Adverse selection and agency conflicts caused by asymmetric information, which is the source of the high cost of corporate finance managers’project decision-making mistakes. High-quality financial reporting accounting information disclosed will help to alleviate information asymmetries between shareholders, managers and creditors, to mitigate adverse selection caused by financing constraints and agency conflicts caused by the project decision-making mistakes, so as to effectively alleviate the insufficient investment and excessive investment behavior, and improve investment efficiency.The fourth part is the study design, including sample selection, variable definitions, model design, data descriptive statistics, regression analysis, and supplemental inspection six parts.The fifth part is conclusions and recommendations. This section is a summary of the study, then to make policy recommendations based on the conclusions and bring out the outlook on future research.