Information quality and Investment efficiency

Inês Lisboa, Magali Costa, Renato Cruz

Abstract


Purpose - The aim of this study is to analyze the impact of the quality of financial information on the investment efficiency of small and medium-sized enterprises (SMEs).

Design/methodology - An unbalanced panel data sample of 608 Portuguese firms in the agri-food sector is analyzed over 2015-2022. Investment inefficiency is measured using the investment model based on growth opportunities. Besides the global inefficiency, the analysis is split into over and underinvestment (two investment inefficiencies). Financial information quality is measured through five proxies, namely earnings smoothing, accruals quality, earnings persistence, earnings predictability, and conservatism. The final model is estimated using Ordinary Least Squares. The impact on the probability of having a higher level of inefficiency is also tested using the Logit model.

Findings - The results show that financial information quality impacts companies’ investment efficiency. Companies with more accruals quality (less earnings management practice) increase the likelihood of more efficient investments. Moreover, companies with more conservative practices incur in underinvestment to reduce uncertainties.

Originality - This study contributes to the debate on investment efficiency. It adds knowledge to the existent literature by analyzing unlisted companies, which have singular investment opportunities, and an unexplored sample, the agri-food SMEs. Additionally, the analysis includes several financial information quality proxies, three of which — persistence, predictability and conservatism — have not, as far as we know, been addressed before and are relevant to explaining investment inefficiency. Finally, the conclusions are highly relevant to practice.


Keywords


Information quality; Financial Reporting Quality; Investment Efficiency; Investment inefficiency; SMEs.

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References


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