Financial reporting quality 1 as a determinant of the relationship between financial constraints and investment efficiency : an applied study on nonfinancial firms listed in the Egyptian stock exchange

Abstract EN

This paper is based on the perspective of firm's agency conflicts to examine the relationship between financial constraints on one hand measured by a composite score that encompasses the firm's cash balance scaled by total assets and the firm's negative capital structure and investment efficiency on the other.

To reduce measurement errors, financial reporting quality which serves as the moderating factor in this relationship is measured by several proxies as there is no single well defined measure for this variable.

A sample of 234 nonfinancial firms listed in the Egyptian stock market during the period 2013–2016 is used to test the empirical models through regression analysis.

Results agreed with previous studies regarding the effect of financial reporting quality on investment efficiency and study was able to provide empirical evidence regarding the positive effect of financial reporting quality on the efficiency of investment.

However, with respect to the effect of financial constraints and the interactive effect of financial constraints and financial reporting quality on the efficiency of investments, results ran counter to the researcher's predictions as a significant negative effect was found between these two variables and the dependent variable which is the efficiency of investment which raises several questions concerning earnings management practices by management of firms listed in Egyptian stock Exchange showing no concern with financial reporting quality.

Such a relationship appeared to be more obvious for overinvesting firms compared to their underinvesting counterparts even though the number of underinvesting firms in the sample was much more greater than their overinvesting counterparts which emphasizes these results and shows that as long as management finds the internal funds available, they are not concerned with improving the quality of their financial reports.

This paper extends the accounting literature concerning financial reporting quality and investment efficiency to the emerging capital markets in the world.

Moreover, this is the first study that examines the interaction effect between financial reporting quality and financial constraints, taking financial constraints as an independent variable on listed companies in Egypt.