Financial Reporting Quality, Free Cash Flow, and Investment Efficiency

This paper based on the perspective of firm’s agency conflicts to examine the relationship between financial reporting quality and investment efficiency and to analyze the interaction effect between financial reporting and free cash flow on investment efficiency. We use 3,726 samples of Chinese list...

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Bibliographic Details
Published in:SHS web of conferences 2015, Vol.17, p.1027
Main Authors: Wang, Fusheng, Zhu, Zhibiao, Hoffmire, John
Format: Article
Language:English
Subjects:
Cash flow
Efficiency
Financial reporting
financial reporting quality
free cash flow
investment efficiency
overinvestment
Quality
underinvestment
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Summary:This paper based on the perspective of firm’s agency conflicts to examine the relationship between financial reporting quality and investment efficiency and to analyze the interaction effect between financial reporting and free cash flow on investment efficiency. We use 3,726 samples of Chinese listed firms during the period 2008–2012 to test the empirical models and find that financial reporting quality is negatively associated with both underinvestment and overinvestment. Further, we find that financial reporting quality is more strongly associated with overinvestment for firms with large free cash flow, which suggests that financial reporting quality can reduce information asymmetry arising from agency conflicts between the managers and investors. This paper extends the field of application of financial reporting quality and investment efficiency in the emerging capital markets in the world. Moreover, this is the first study that analyzes the interaction effect between financial reporting quality and free cash flow on investment efficiency.
ISSN:2261-2424
2416-5182
2261-2424
DOI:10.1051/shsconf/20151701027