Investment Efficiency and Earnings Quality: European Evidence

Abstract

This study aims to analyze the relationship between earnings quality and investment efficiency in the European context, in order to understand whether higher earnings quality mitigates investment inefficiencies. To further understand the relationship between earnings quality and investment efficiency, the roles of cash and financial constraints are also analyzed. We use firm-year data based on unbalanced panel data, and control for country, year, and industry fixed effects using a sample composed of listed and unlisted European companies from 19 countries and 17 industries for the period 2010–2018. The results show a positive and significant relationship between earnings quality and investment efficiency. In both scenarios of investment inefficiency, overinvestment and underinvestment, the results suggest that a higher quality of reported earnings mitigates investment inefficiencies. The results also suggest that the negative relationship holds for cash-constrained and unconstrained firms, and that in firms that are financially unconstrained (higher levels of cash and lower levels of leverage) the combined effect with earnings quality is associated with a lower investment efficiency.

Firms’ Investment Level and (In)Efficiency: The Role of Accounting Information System Quality

“…While in Model 1 the DAC variable is not statistically significant, in Model 2 it is significant at a 5% level, exhibiting a positive sign, suggesting that when discretionary accruals increase, this enhances overinvestment, and this in turn means that overinvesting tends to increase for firms that have a lower accounting information system quality in accordance to Gaio et al (2023), Yuan et al (2022), Lei et al (2022), Cardoso (2019), Linhares et al (2018), andBiddle et al (2009). Model 2 allows us to support our H2.…”

“…In that sense, firms with a low accounting information system quality would have difficulties obtaining additional funds to support the investment projects. In the same vein, Gaio et al (2023) find empirical evidence that a higher earnings quality mitigates investment inefficiencies, both underinvestment and overinvestment. However, the findings of Rahman et al (2013) suggest that earnings management among underinvesting firms reduces information asymmetry.…”

“…Therefore, Ma and Jeong (2022) argue that it is necessary to promote the efficiency of firms' investment. In the same vein, Gaio et al (2023) and Lambert et al (2007) suggest that the increase in the quality of financial reports leads to relevant economic implications in firms, such as the efficiency of investments made. Moreover, Pereira et al (2023a) find empirical evidence that Portuguese small and medium entities (SMEs) with higher levels of investment tend to have a more conservative accounting practice to capture investors' confidence.…”

Impact of Profitability, Firm Size and Investment Opportunities on Earning Quality: Evidence from Pakistan

“…Nissim (2022) conducted a comprehensive analysis of earnings quality issues, linking financial statement indicators to specific concerns using a working definition of earnings quality. Gaio (2023) demonstrated a positive correlation between investment efficiency and earnings quality, suggesting higher earnings quality reduces investment inefficiencies. Yahay et al (2017) revealed firm size affects earnings quality in Nigeria's listed deposit money banks, and integrated revenue-raising strategies have a significant positive impact on earnings quality.…”

قياس أثر جودة الإستحقاق المحاسبي على العلاقة بين التدفقات النقدية الحرة والأداء المالي لمنشآت الأعمال السعودية: دراسة تطبيقية

“…‫أل‬ ‫فس‬ ‫لرولهد‬ ‫ةع‬ ‫لر‬ ‫كلهدممسقاس‬ ‫ر‬ ‫حل‬ ‫ل‬ ‫لدألاف‬ ‫لهدم.تثمه‬ ‫ه‬ ‫رال‬ ‫تييحل‬ ‫عهألهدم‬ ‫نلق‬ ‫فولت‬ ‫تعالا‬ Muchtar et al, 2018 (Sapuan et al, 2021;Sinaga and Maksum, 2022;Yousef and Ojah, 2022) ‫.تمهل‬ ‫جلقآلهألرهلاللجل‬ ‫حل‬ ‫هلر‬ ‫ثلق‬ ‫لهلرعسةحلم‬ ‫ا‬ ‫رول‬ ‫هلهدمضهاأل‬ ‫لر‬ ‫آلهدممسقاس‬ ‫حلر‬ ‫م‬ ‫هدم.س‬ ‫يل‬ ‫لهلبهق‬ ‫ل‬ ‫سد‬ ‫لهدم‬ ‫لرةسق‬ ‫ل‬ ‫هاس‬ ‫لهدلق‬ ‫ةض‬ ‫لرهل‬ ‫سلرسلق‬ ‫ةهمتفسلهد.سةهأحل‬ ‫تييل‬ ‫عهألهدم‬ ‫نلق‬ ‫لت‬ ‫ز‬ ‫نس‬ ‫يلاللرباهلا‬ ‫لافالهلبهق‬ ‫قهمألر‬ ‫د‬ ‫الأل‬ ‫هد.س‬ (Chung et al, 2005;Abughniem et al, 2020;Lai et al, 2020) (Biddle and Hilary, 2006;Biddle et al, 2009;Rad et al, 2016;Eissa et al, 2023 (Chung et al, 2005;Abughniem et al, 2020;Lai et al, 2020) ‫ل‬ ‫و‬ ‫عس‬ ‫ل‬ ‫ه‬ ‫لريا‬ ‫مسب‬ ‫ل‬ ‫ن‬ ‫لت‬ ‫لهأللهن‬ ‫هاس‬ ‫لهدلق‬ ‫لر‬ ‫لهدةليل‬ ‫ل‬ ‫لق‬ ‫مس‬ ‫ل‬ ‫ح‬ (Gaio and Raposo, 2011;Hau, 2017;Bukit et al, 2019 Brush et al, 2000;Chung et al, 2005;Hau, 2017;Butt et al, (Chen et al, 2012;Tang et al, 2014;Sapuan et al, 2021) Zhou and Ruland, 2006;Huang et al, 2009) . ‫لل‬ ‫ل‬ ‫ل‬ ‫تلرالس‬ ‫األهدسكسدألد‬ ‫لر‬ ‫مهألمسبيلهلاتعالسةلهدمعسافولرولهدعللر‬ ‫نلق‬ ‫لت‬ ‫هاس‬ ‫ةضلهدلق‬ ‫كسدكلربكلل‬ ‫ل‬ ‫لهلاتثمسق‬ ‫لرهط‬ ‫لرمسقاس‬ ‫لر‬ ‫لهدعل‬ ‫و‬ ‫لل‬ ‫لر‬ ‫يح‬ ‫لهدعه‬ ‫أ‬ ‫الل‬ ‫هد‬ (Wang et al, 2015;Gaio et al, 2023;Eissa et al,…”