Does Earnings Quality Affect Investment Efficiency? Evidence from Listed Firms in the Nairobi Securities Exchange of Kenya

Abstract

Aim/purpose – This paper aims at examining the impact of earnings quality on investment efficiency. The motivating factor is occasioned by poor financial reporting quality standards, higher costs of investment that characterize most developing countries and in particular Kenya where agency problems and insufficient information sent to the public by managers are rather severe and likely to lead to inefficient investment. Design/methodology/approach – This study uses a sample of 28 Non financial firms listed in the Nairobi Securities Exchange and data for the period 2010-2020. Data was analyzed through fixed effects regression analysis. Findings – The study finds a positive link between earnings quality and investment efficiency of firms listed in the Nairobi Securities Exchange. Specifically, high earnings quality increases investment efficiency and improves investment project selection by reducing information asymmetry between managers and shareholders. Research implications – Based on the results, the study recommends that since earnings quality enhances investment efficiency, firms need to strengthen internal mechanisms and increase earnings quality. Besides, corporate shareholders should pay more attention to the earnings quality to gain more return on their investment opportunities. Further, it is necessary for shareholders to continuously monitor the firm's activities and prevent adverse activities from harming their interests.