Financial Reporting Quality and Labor Investment Efficiency

• Published in: Contemporary accounting research 2014-12, Vol.31 (4), p.1047-1076
• Main Authors: Jung, Boochun, Lee, Woo-Jong, Weber, David P.
• Format: Article
• Language: English
• Subjects: Accounting; Accounting firms; Capital investments; Financial reporting; Investors; Managers; Workforce
• ISSN: 0823-9150; 1911-3846
• DOI: 10.1111/1911-3846.12053

A large literature in finance provides evidence that agency conflicts and information asymmetry between managers and outsiders lead firms to undertake suboptimal levels of investment (Hubbard 1998 and Stein 2003 provide surveys of this literature). Recent accounting research builds on this notion in arguing that high-quality financial reporting can serve to mitigate such market imperfections and improve investment efficiency (e.g., Bushman and Smith 2001; Healy and Palepu 2001; Lambert, Leuz, and Verrecchia 2007). Consistent with this argument, a growing body of empirical evidence suggests that high-quality accounting is associated with more efficient capital investments (e.g., Biddle and Hilary 2006; McNichols and Stubben 2008; Biddle, Hilary, and Verdi 2009). We extend this line of research by examining investments in labor, an important factor of production that has been largely overlooked by previous literature. We posit that high-quality financial reporting leads to more efficient investments in labor by mitigating market frictions that stem from information asymmetry between managers and outside capital suppliers.