Financial Reporting Quality, Debt Maturity, and Chief Executive Officer Career Concerns on Investment Efficiency

Darlin Aulia,Sylvia Veronica Siregar

doi:10.1590/1807-7692bar2018170120

Darlin Aulia, Sylvia Veronica Siregar

Open Access

https://doi.org/10.1590/1807-7692bar2018170120

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Abstract

Abstract The purpose of this research is to investigate the effect of financial reporting quality, debt maturity, and CEO career concerns on investment efficiency in Indonesia. This study used a sample of 680 observations from non-financial companies in Indonesia during the period from 2012 to 2015 using panel regression. The results show that financial reporting quality does not affect investment efficiency. This might be because the quality of financial reporting has no effect in the overinvestment scenario. Under this condition, financial reporting quality cannot mitigate the occurrence of overinvestment due to the high level of agency problems. However, financial reporting quality has a significantly positive effect under condition of underinvestment, which means that financial reporting quality can reduce the occurrence of underinvestment because it can be used to attract external funds so that companies can avoid underinvestment conditions. The debt maturity has a negative effect on investment efficiency. In particular, debt maturity has no effect on underinvestment, but it does have an effect on overinvestment, because by using short-term debt, the company has funds that can be used to make investments to enable overinvestment. CEO career concerns have no effect in underinvestment conditions because companies do not experience funding constraints, so the CEO career concerns do not mitigate underinvestment. Whereas in conditions of overinvestment, career concerns have a positive effect. Thus, CEO career concerns can reduce the occurrence of overinvestment.

Highlights

Various countries have policies to increase investment from domestic and foreign capital
The relationship between financial reporting quality and investment efficiency is related to the reduction of information asymmetry between firms and external capital providers
Based on the previous explanation, we propose the following hypothesis: hypothesis 1 (H1): Financial reporting quality is positively associated with investment efficiency

Summary

Introduction

Various countries have policies to increase investment from domestic and foreign capital This is done by governments because the investment activity will encourage the country’s economic activities, increase its output, and achieve savings of foreign exchange or even increase incoming foreign investment. Higher financial reporting quality can limit managerial incentives to engage in activities that degrade corporate value, such as empire-building in companies with excess capital (in other words, limiting overinvestment). This can be achieved if better financial reporting quality enables better contracting to prevent inefficient investment and enhance investors’ ability to monitor management's investment decisions (Biddle, Hilary, & Verdi, 2009)

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