Financial reporting quality, debt maturity and investment efficiency

•We examine the role of FRQ and debt maturity in investment efficiency.•We find that FRQ reduces overinvestment.•We find that shorter debt maturity mitigates overinvestment and underinvestment.•The effect of FRQ on investment efficiency is decreasing with shorter maturities. This study, conducted wi...

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Bibliographic Details
Published in:Journal of banking & finance 2014-03, Vol.40, p.494-506
Main Authors: Cutillas Gomariz, Mª Fuensanta, Sánchez Ballesta, Juan Pedro
Format: Article
Language:English
Subjects:
Consolidation
Debt management
Debt maturity
Efficiency
Financial reporting
Financial reporting quality
Investment efficiency
Investment policy
Maturity
Overinvestment
Studies
Underinvestment
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Summary:•We examine the role of FRQ and debt maturity in investment efficiency.•We find that FRQ reduces overinvestment.•We find that shorter debt maturity mitigates overinvestment and underinvestment.•The effect of FRQ on investment efficiency is decreasing with shorter maturities. This study, conducted with a sample of Spanish listed companies during the period 1998–2008, examines the role of financial reporting quality and debt maturity in investment efficiency. The results show that financial reporting quality mitigates the overinvestment problem. Likewise, lower debt maturity can improve investment efficiency, reducing both overinvestment and underinvestment problems. We further find that financial reporting quality and debt maturity are mechanisms with some degree of substitution in enhancing investment efficiency: firms with lower (higher) use of short-term debt, exhibit higher (lower) financial reporting quality effect on investment efficiency.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2013.07.013