Financial reporting quality and investment efficiency: A transnational evidence

Khan, Muhammad Azha ; Sa da , Nabeel; Manzoo , Wajiha
A icle
Financial epo ing quali y and in es men e iciency: A
ansna ional e idence
Pakis an Jou nal o Comme ce and Social Sciences (PJCSS)
P o ided in Coope a ion wi h:
Joha Educa ion Socie y, Pakis an (JESPK)
Sugges ed Ci a ion: Khan, Muhammad Azha ; Sa da , Nabeel; Manzoo , Wajiha (2024) : Financial
epo ing quali y and in es men e iciency: A ansna ional e idence, Pakis an Jou nal o
Comme ce and Social Sciences (PJCSS), ISSN 2309-8619, Joha Educa ion Socie y, Pakis an (JESPK),
Laho e, Vol. 18, Iss. 2, pp. 285-305
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Pakis an Jou nal o Comme ce and Social Sciences
2024, Vol. 18(2), 285-305
Pak J Comme Soc Sci
Financial Repo ing Quali y and In es men
E iciency: A T ansna ional E idence
Muhammad Azha Khan
NUST Business School, Na ional Uni e si y o Sciences and Technology, Islamabad, Pakis an
Email: azha .phd19nb[email p o ec ed]s .edu.pk
Nabeel Sa da (Co esponding au ho )
NUST Business School, Na ional Uni e si y o Sciences and Technology, Islamabad, Pakis an
Email: nabeel.sa da @nbs.nus .edu.pk
Wajiha Manzoo
Depa men o Economics, COMSATS Uni e si y Islamabad, Pakis an
Email: wajiha.manzoo[email p o ec ed]
A icle His o y
Recei ed: 18 Ap 2024
Re ised: 23 June 2024
Accep ed: 26 June 2024
Published: 30 June 2024
Abs ac
In de eloped ma ke s, he connec ion be ween inancial epo ing quali y (FRQ) and
enhanced in es men e iciency is well-documen ed. Howe e , i emains unce ain
whe he his ela ionship holds ue in eme ging, on ie , and a ious o he ma ke s. This
esea ch p obes in o his ela ionship ac oss 18,231 publicly lis ed i ms spanning hi y-
six coun ies wo ldwide, encompassing a ious ma ke ca ego ies. Comp ehensi e
accoun ing da a is ga he ed o publicly aded i ms om 2009 o 2023, spanning 40
di e en indus ies in hese ma ke s. We used S a a and employed ixed-e ec s eg ession
analysis, augmen ed by al e na i e p oxies and obus ness in es iga ion, causal
connec ions a e explo ed. The endogenei y conce ns a e add essed using 2SLS eg ession
analysis. The indings disclose a posi i e in luence o FRQ on in es men e iciency no
only in de eloped ma ke s bu also ac oss eme ging, on ie , and o he ma ke s.
Fu he mo e, ou analysis o o e - and unde -in es men scena ios highligh s a signi ican
ela ionship be ween FRQ and in es men e iciency in bo h con ex s. These indings
expand he cu en body o knowledge, indica ing ha he ela ionship be ween FRQ and
in es men e iciency ex ends beyond de eloped ma ke s o include eme ging, on ie , and
o he ma ke s wi h a ied epo ing s anda ds and inancial en i onmen s.
Keywo ds: Financial epo ing quali y, in es men e iciency, modi ied Jones model,
eme ging ma ke s, de eloped ma ke s, on ie ma ke s.
Financial Repo ing Quali y and In es men E iciency
286
1. In oduc ion
The li e a u e delinea es he e iciency o he i m in h ee o ms. These a e p oduc i e,
labou and in es men e iciencies. This s udy ocuses only on he in es men e iciency
o he i m. The concep o in es men e iciency e e s o a i m's adep ness in pu suing
en u es wi h posi i e NPV , as opposed o occu ences o o e in es men o
unde in es men , cha ac e ised by engaging in nega i e NPV en u es o abs aining om
posi i e NPV oppo uni ies, espec i ely. This de ini ion o e iciency is aligned wi h he
o e a ching objec i e o i ms o maximise sha eholde weal h (Goma iz & Balles a,
2014). On he o he hand, inancial epo ing quali y (FRQ) deno es he accu acy o he
business accoun s in he ansmission o in ui ions ega ding a i m's ope a ions,
pa icula ly c ucial o equi y in es o s, i.e., an icipa ed cash- lows (Biddle e al., 2009).
Financial epo ing se es as a means o i ms o ansmi business heal h, losses, ope a ing
haza ds, and communica ions wi h equi y in es o s (T inh e al., 2022). Howe e ,
challenges a ise om in o ma ion asymme y, complica ing o e sigh o i ms (Renneboog
& Szilagyi, 2020).
Al hough exis ing li e a u e has ex ensi ely examined he link be ween FRQ and he
in es men e iciency o a coun y wi hin de eloped coun ies (e.g., Biddle, Hila y &
Ve di, 2009; Goma iz & Balles a, 2014), he gap in knowledge con inues abou his
ela ionship in ma ke s like eme ging and on ie . F on ie ma ke s, ypically small in size
and low in accessibili y, o en all behind hei eme ging coun e pa s. Despi e hei
po en ial, alua ion challenges s emming om in o ma ion asymme y a e p e alen in
hese ma ke s (Al aih, 2016).
The signi icance o FRQ may be diminished, in eme ging, on ie and o he ma ke s,
owing o ma ke ailu es ha hinde sha es’ p ice capabili y o imi a e exis ing in o ma ion
o he i m. Pa icula ly, in o ma ion asymme y may inc ease due o in o ma ion pauci y,
as obse ed in he eme ging s ock ma ke o China (Hussain e al., 2020). Howe e ,
in o ma ion p oduced by accoun ing epo s emains c ucial in hese ma ke s, po en ially
su passing subs i u i e sou ces (Lopes, 2002).
This s udy aims o in es iga e he impac o FRQ on he in es men e iciency, expanding
upon p io esea ch by examining a uni e sal con ex ha encompasses eme ging, on ie ,
and o he ma ke s, apa om de eloped ma ke s. As he eme ging, on ie , and o he
ma ke s a e b anded by he p e alence o concen a ed owne ship, we an icipa e ha
in es men decisions will be made wi h mode a e isks. Fu he mo e, dis inguishing
sub le ies in ea nings managemen p ac ices in eme ging and on ie ma ke s lead o
dissimila i ies wi h ma ke s wi h de eloped s a us (Ma ens, Yapa, & Sa a i, 2021; Lin &
Wu, 2014).
Khan, Sa da & Manzoo
287
To shed ligh on hese complexi ies, we in es iga e he in luence o FRQ on in es men
e iciency in publicly aded i ms ac oss de eloped, eme ging, on ie , and o he ma ke s,
p o iding a comp ehensi e pe spec i e. We used accoun ing da a om 2009 o 2023 o
18,231 i ms ac oss hi y-six coun ies. We used S a a so wa e and employed eg ession
using ixed e ec s, and a wo-s aged leas squa e was used o add ess endogenei y. Ou
esul s disclose a posi i e link be ween inancial epo ing quali y and in es men
e iciency in a ious ypes o eme ging, on ie and o he ma ke s apa om de eloped
ma ke s. Ou s udy con ibu es o he li e a u e by ex ending he explo a ion o he FRQ-
in es men e iciency ela ionship o di e se ma ke s, demons a ing a signi ican
associa ion in bo h unde -in es men and o e -in es men si ua ions. Despi e he
p e alence o concen a ed owne ship and ea nings managemen in eme ging and on ie
ma ke s, he esul s e eal ha he linkage be ween FRQ and in es men e iciency is no
con ex -dependen by p o iding ansna ional empi ical e idence.
The s uc u e o his pape is o ganized in o ollowing sec ions. Sec ion 2 del es in o a
e iew o pe inen li e a u e, and subsequen ly p oposes he hypo heses ha will be es ed.
Sec ion 3 elabo a es on he esea ch design and me hodology, de ailing he p ocesses and
echniques employed in he s udy. Sec ion 4 p esen s he empi ical indings, o e ing a
ho ough analysis and discussion o he esul s ob ained om he esea ch. Finally, Sec ion
5 concludes he pape by summa izing he key con ibu ions and implica ions o he s udy,
highligh ing i s signi icance and po en ial impac on he ield.
2. Li e a u e Re iew
The inancial epo ing s anda ds and GAAP manda e he leas equi emen s o e ealing
bookkeeping igu es. These s anda ds and p inciples may allow leeway in inancial
epo ing, p esen ing oppo uni ies o manage s o exe cise disc e ion, and may lead o
adap able conduc (Leuz e al., 2003). The manage s o a i m wi h commendable
pe o mance may aspi e o di e en ia e hemsel es by he use o g ea e FRQ, le e aging
on he isible inancial epo s o highligh hei i ms’ in isible quali ies (Zhang &
Wie sema, 2009). Con e sely, i ms wi h low FRQ a e equen ly ela ed o ea nings
managemen . They can yield an agonis ic ou comes (Hickman e al., 2021; La a, Osma, &
Penal a, 2016), as exempli ied in he En on, Sa yam Compu e Se ices, and Wo ldCom cases.
Manage s' olun a y disclosu e o in o ma ion aligns wi h he agency (Jensen & Meckling,
1976) and signaling (Spence, 1973) heo ies (Alsos & Ljungg en, 2017; Yasa , Ma in &
Kiessling, 2020). Agency heo y pos ula es ha con lic s o in e es a ise due o he
sepa a ion o powe and con ol, which may p o oke manage s o make decisions ha se e
hei pe sonal objec i es a he cos o sha eholde s o in es o s (Alam, Ramachand an, &
Nahomy, 2020). Agency heo y unde sco es a obus co ela ion be ween inancial
epo ing disclosu es and p o i abili y, i.e., in es men e iciency es e o a i m (Wa son
e al., 2002). Fi ms equipped wi h high-quali y in o ma ion exhibi educed de ia ion om
he sui able in es men planes (Chen e al., 2011; McNichols & S ubben, 2008). The
Financial Repo ing Quali y and In es men E iciency
288
second guiding p inciple shaping he ela ionships among a iables is signaling heo y.
This heo y posi s ha co po a e choices o manage s a e like signals om a i m o
in es o s, educing he asymme y o in o ma ion. I u he p oposes ha p o icien i ms
a emp o communica e hei excellence o sha eholde s ia he quali y o hei inancial
epo ing, he eby diminishing asymme ies o in o ma ion, bols e ing he e iciency o
in es men , and os e ing in es o s' con idence in manage ial capabili ies (Wa son e al.,
2002).
The accoun ing li e a u e indica es ha accoun ing p ac ices play a c ucial ole in guiding
managemen 's in es men decisions and mi iga ing agency con lic s, in eg a es agen ’s and
sha eholde ’s objec i e unc ions, and diminishes he likelihood ha manage ac s agains
sha eholde s' in e es s (Bushman & Smi h, 2001). An expec a ion model o in es men is
buil by Richa dson (2006) o measu ing in es men e iciency. This model bi u ca es
i ms’ o al in es men as ‘main enance’ and ‘new’ and e lec s he use o esiduals om
‘new’ in es men as a subs i u ing a iable o in es men e iciency. Qingyuan (2009)
uses his model and p o ides empi ical e idence ha good accoun ing in o ma ion quali y
is nega i ely ela ed o o e in es men in i ms. This inding aligns wi h he deduc ion by
Fazza i, Hubba d and Pe e sen (1988) ha in es men e iciency inc eases when
in o ma ion asymme y dec eases. Biddle and Hila y (2006) empi ically es he
ela ionship be ween accoun ing in o ma ion and in es men e iciency and epo a
signi ican posi i e associa ion. Chen, Hope, Li and Wang (2011) examine he non- aded
p i a e i ms and documen a signi ican posi i e e ec o sui able inancial epo ing on
he e iciency o in es men . They s a e ha quali y accoun ing in o ma ion mi iga es he
asymme y o in o ma ion and ende s he ines quali y o inancial epo ing necessa y.
Which in u n in luence he in es men decision making by he use s o he epo s.
E idence is a ailable in de eloped ma ke s ha good inancial epo ing quali y diminishes
he p opensi y o o e in es men owing o be e in o ma ion en i onmen and esul an
moni o ing by in es o s (Goma iz & Balles a, 2014). They explain ha when in o ma ion
ele an o a decision is dis o ed (i.e., he e is high in o ma ion asymme y), i will esul
in subop imal in es men decisions in he o m o o e in es men . Song (2016) e eals ha
good quali y inancial epo ing cu bs unde -in es men .
The cu en s udy con ends ha good inancial epo ing quali y limi s manage s om
engaging in bo h unde in es men and o e in es men . O e in es men is limi ed because
good inancial epo ing quali y es ains dishones usage o ee cash lows since ou side
in es o s ha e almos he same le el o in o ma ion as he manage s ha e (Fazza i,
Hubba d & Pe e sen, 1988; Goma iz & Balles a, 2014). This p ecludes he consump ion o
unds by sel -cen e ed manage s om accep ing nega i e ne p esen alue p ojec s and
may p e en o e in es men . On he o he hand, unde -in es men is limi ed because good
accoun ing p ac ices play a c ucial ole in guiding managemen 's in es men decisions and
mi iga ing agency con lic s, in eg a es he agen ’s and sha eholde ’s objec i e unc ion,
and diminishes he likelihood ha he manage ac s agains sha eholde s' in e es s
(Bushman & Smi h, 2001; Song, 2016). These moni o ing e o s o he alignmen o

Khan, Sa da & Manzoo
289
in e es s induce manage s o accep posi i e ne p esen alue p ojec s. Hence, he chances
o unde in es men a e educed. When inancial epo ing quali y is high in a i m, i helps
in be e iden i ica ion o p ojec s ia ue accoun ing numbe s, which means in e nal
decision-making is enhanced (Chen e al., 2011; Goma iz & Balles a, 2014). Hence,
in es men e iciency is imp o ed. In o he wo ds, manage s o he i ms ha ing abo e
a e age pe o mance ha e incen i e o send good signals, in he o m o inancial epo ing
quali y, and esul an ly he in es men e iciency o he i m is enhanced owing o educed
in o ma ion asymme y.
Agains he backd op o he p e alen agency issues o con lic s o in e es and he need
o signaling disclosu e, his s udy p oposes ha high inancial epo ing quali y
signi ican ly in luences in es men e iciency. This e ec s ems om se e al i al easons.
The i s eason is ha FRQ ac s as a de e en agains con lic s o in e es , hus nu u ing
imp o ed in es men decisions by acili a ing in asso men o ex a money-making
en u es (Bushman & Smi h, 2001). The second eason is ha s ong FRQ helps alle ia e
he asymme y o in o ma ion be ween in es o s and manage s, he eby educing
moni o ing cos s (Chen, Hope, Li & Wang, 2011), which may lead o in es men
e iciency. The hi d eason is ha be e epo ing quali y empowe s inancie s o moni o
and glean alued unde s andings om he in es men ac i i ies o a i m, he eby bols e ing
in es men decisions (Goma iz & Balles a, 2014).
By le e aging on he s a ed li e a u e, his s udy an icipa es ha be e FRQ displays a key
pa in imp o ing in es men e iciency ac oss publicly aded i ms in de eloped,
eme ging, on ie , and o he ma ke s. Consequen ly, he s udy o mula es i s hypo heses
as ollows:
➢ H1: FRQ has a signi ican posi i e impac on in es men e iciency wo ldwide.
➢ H2: FRQ posi i ely in luences in es men e iciency in de eloped ma ke s.
➢ H3: FRQ posi i ely a ec s in es men e iciency in eme ging ma ke s.
➢ H4: FRQ posi i ely impac s in es men e iciency in on ie and o he ma ke s.
3. Resea ch Me hodology
3.1 Va iable Measu emen
3.1.1 In es men E iciency and Financial Repo ing Quali y
In es men E iciency (IEb) is he dependen a iable, which is measu ed by mul iplying -
1 o he absolu e alue o he esidues (Biddle e al., 2009). The highe he IEb alues, he
highe he in es men e iciency. FRQ is he independen a iable and is measu ed using
modi ied Jones (FRQJ) (Dechow e al., 1995), Ko ha i e al. (2005) (FRQK) and McNichols
and S ubben (2008) (FRQMS) models. To o se he bias o one p oxy, use o mul iple
p oxies is encou aged (Assad & Alshu ideh, 2020). All o he FRQ measu es a e calcula ed
by mul iplying -1 o he absolu e alue o he esidues o he models. The highe he FRQ
alues, he highe he inancial epo ing quali y.
Financial Repo ing Quali y and In es men E iciency
290
3.1.2 Con ol Va iables
In line wi h p e ious li e a u e, se e al con ol a iables a e included o alle ia e he
conce ns o bias due o omi ed a iables. These a iables encompass i m size (SIZE), he
ma ke alue o book alue a io (MBR), he s anda d de ia ion (SD) o cash lows om
ope a ions (CFO), SD o sales (SALES), SD o all in es men s (INVEST), dis ess measu e
o he i m (ZSCORE), he asse s’ angibili y o (TNG), le e age measu e o he i m
(LEV) and indus y (INDUS), cash lows om ope a ions o sales (OCFS), cash and sho -
ange in es men s o ne PPE a io (SLACK), age o he i m (AGE), a bina y a iable o
he di idend paymen (DIV) (1 o paying and 0 o non-paying i ms), i m’s ope a ing
cycle (OPCYL), and a bina y a iable o loss (LOSS) (1 o nega i e EBIT i ms and 0
o he wise).
3.2 Sample Desc ip ion
This s udy co e s all publicly lis ed i ms ca ego ized acco ding o he 48-indus y
classi ica ion o Fama & F ench, wi h inancial and u ili y i ms excluded owing o high
egula o y cons ain s and compa abili y issues. Da a is sou ced om Da aS eam,
spanning om 2009 o 2023, ensu ing he inal da ase o 157,908 i m-yea obse a ions
ac oss o y indus ies wi hin hi y-six ma ke s ha ing de eloped, eme ging, on ie , and
o he s a uses. Classi ica ion o de eloped, eme ging and on ie ma ke s is based on
c i e ia ou lined by Mo gan S anley Capi al In e na ional (MSCI), while he emaining
ma ke s a e ca ego ized as 'o he s'. The sample selec ion includes Aus alia, Belgium,
Canada, Denma k, Finland, F ance, Ge many, Hong Kong, Is ael, I aly, Japan,
Ne he lands, No way, Singapo e, Spain, Sweden, UK and USA o ep esen de eloped
ma ke s. Eme ging ma ke s a e exempli ied by China, G eece, India, Indonesia, S. Ko ea,
Kuwai , Malaysia, Philippines, Poland, Sou h A ica, Taiwan, Thailand and Tu key.
Whe eas Jo dan, Pakis an, S i Lanka, Russia and Vie nam show ep esen a ion o on ie
and o he ma ke s.
3.3 Econome ic Model
Following is he baseline OLS panel eg ession o add ess he esea ch ques ions:
𝐼𝐸𝑏(𝑗,𝑡) = ⍺0 + ⍺1𝐹𝑅𝑄𝑗,𝑡−1 + 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 + 𝑌𝑒𝑎𝑟 𝐹𝐸 + Ind FE + Con FE + ɛ𝑗,𝑡 (1)
Whe e IEb(j, ) is he dependen a iable in es men e iciency o i m j in yea , FRQj, -1
ep esen s he inancial epo ing quali y measu e. Con ols deno e con ol a iables and
ixed-e ec s (FE) indica o a iables o yea (Yea ), Indus y (Ind), and coun y (Con).
The andom e o e m is indica ed by ɛ𝑗,𝑡.
4. Resul s and Discussion
4.1 Desc ip i e S a is ics
The sample consis s o 18,231 i ms ac oss eigh een de eloped, hi een eme ging and i e
on ie and o he ma ke s, esul ing in a o al o 157,908 i m-yea obse a ions ac oss
hi y-six coun ies in he o e all sample. A signi ican po ion is ep esen ed by China,
Khan, Sa da & Manzoo
291
India, Japan, Sou h Ko ea, Taiwan, and he USA, con ibu ing 11,837 i ms wi h 114,837
obse a ions (72% o 157,908). Con e sely, he eigh smalles cons i uen s, including
Belgium, Denma k, Finland, G eece, Jo dan, Kuwai , Ne he lands, and No way,
collec i ely accoun o 737 obse a ions. The FF indus y classi ica ion indica es ha
business se ices hold he la ges sha e, ollowed by cons uc ion and business se ices,
o aling 31,287 obse a ions. Con e sely, ai c a , unca ego ized i ms, and bee and liquo
a e he h ee smalles cons i uen s in he sample, comp ising 512 obse a ions. We obse e
a subs an ial inc ease in obse a ions in ecen yea s.
The desc ip i e s a is ics a e p esen ed in Table 1, which show obse a ions, mean,
maximum alues, s anda d de ia ion (SD) and minimum alues o he a iables.
In es men e iciency (IEb) displays he mean (SD) o -0.9 (86.3), FRQJ has -0.8 (5.8),
FRQK has -0.2 (2.5), and FRQMS has -0.1 (5.3). The alues a e compa able wi h p io
esea ch (e.g., Goma iz & Balles a, 2014). Pai -wise co ela ions a e shown in Table 2. We
see posi i e co ela ions be ween FRQ and in es men e iciency measu es.
Table 1: Desc ip i e Measu emen s (A)
Panel A: Full Sample
Panel B: De eloped Coun ies
VARIABLES
Obs.
Mean
SD
Min.
Max.
Obs.
Mean
SD
Min.
Max.
IEb
157,908
-0.9
86.3
-442.7
0.0
78,779
-0.8
23.7
-169.2
0.0
FRQJ
157,908
-0.8
5.8
-984.2
0.0
78,779
-1.4
8.1
-984.2
0.0
FRQK
157,908
-0.2
2.5
-470.4
0.0
78,779
-0.4
3.5
-470.4
0.0
FRQMS
157,908
-0.1
5.3
-208.0
0.0
78,779
-0.1
7.4
-208.0
0.0
SIZE
157,908
15.4
3.1
4.8
22.0
78,779
14.6
3.4
4.8
22.0
MBR
157,908
1.3
2.2
0.0
30.4
78,779
1.4
2.5
0.0
30.4
CFO
157,908
0.1
0.3
0.0
3.7
78,779
0.1
0.3
0.0
3.7
SALES
157,908
0.5
1.0
0.0
13.0
78,779
0.6
1.1
0.0
13.0
INVEST
157,908
0.1
1.8
0.0
286.3
78,779
0.1
2.5
0.0
286.3
ZSCORE
157,908
0.3
7.9
-112.0
4.8
78,779
-0.5
10.7
-112.0
4.8
TNG
157,908
0.3
0.2
0.0
1.0
78,779
0.3
0.3
0.0
1.0
LEV
157,908
0.2
0.2
0.0
0.9
78,779
0.2
0.2
0.0
0.9
INDUS
157,908
0.2
0.1
0.0
0.3
78,779
0.1
0.1
0.0
0.3
OCFS
157,908
-0.8
6.4
-61.7
1.4
78,779
-1.6
8.6
-61.7
1.4
SLACK
157,908
3.7
15.6
0.0
156.1
78,779
5.3
19.0
0.0
156.1
AGE
157,908
25.3
15.9
0.0
159.0
78,779
30.2
18.5
0.0
159.0
DIV
157,908
0.3
0.4
0.0
1.0
78,779
0.6
0.5
0.0
1.0
OPCYL
157,908
3.8
2.5
-3.3
9.1
78,779
3.4
3.0
-3.3
9.1
LOSS
157,908
0.1
34.0
0.0
1.0
78,779
0.3
0.4
0.0
1.0
Financial Repo ing Quali y and In es men E iciency
292
Table 1: Desc ip i e Measu emen s (B)
Panel C: Eme ging Coun ies
Panel D: F on ie & O he Coun ies
VARIABLES
Obs.
Mean
SD
Min.
Max.
Obs.
Mean
SD
Min.
Max.
IEb
75,281
-0.6
57.9
-151.6
0.0
3,630
-0.1
0.3
-12.1
0.0
FRQJ
75,281
-0.2
0.5
-80.5
0.0
3,630
-0.2
0.1
-1.4
0.0
FRQK
75,281
-0.1
0.1
-7.2
0.0
3,630
-0.1
0.1
-0.7
0.0
FRQMS
75,281
0.0
0.1
-9.7
0.0
3,630
0.0
0.1
-1.1
0.0
SIZE
75,281
16.0
2.4
5.5
22.0
3,630
18.8
2.7
7.5
22.0
MBR
75,281
1.3
1.9
0.0
30.4
3,630
0.5
1.0
0.0
24.6
CFO
75,281
0.1
0.2
0.0
3.7
3,630
0.1
0.2
0.0
3.7
SALES
75,281
0.5
1.0
0.0
13.0
3,630
0.6
1.1
0.0
13.0
INVEST
75,281
0.1
0.3
0.0
29.4
3,630
0.0
0.0
0.0
0.5
ZSCORE
75,281
1.2
2.7
-11.0
4.8
3,630
1.1
3.7
-112.0
4.8
TNG
75,281
0.3
0.2
0.0
1.0
3,630
0.3
0.3
0.0
1.0
LEV
75,281
0.1
0.2
0.0
0.9
3,630
0.2
0.3
0.0
0.9
INDUS
75,281
0.2
0.1
0.0
0.3
3,630
0.2
0.1
0.1
0.3
OCFS
75,281
0.0
2.0
-61.7
1.4
3,630
-0.1
2.2
-61.7
1.4
SLACK
75,281
2.0
10.6
0.0
156.1
3,630
1.5
9.1
0.0
156.1
AGE
75,281
20.4
10.1
1.0
117.0
3,630
15.6
9.4
0.0
64.0
DIV
75,281
0.7
0.5
0.0
1.0
3,630
0.6
0.5
0.0
1.0
OPCYL
75,281
4.2
1.7
-3.3
9.1
3,630
4.3
1.8
-3.3
9.1
LOSS
75,281
0.5
0.2
0.0
1.0
3,630
0.1
0.3
0.0
1.0
Table 2: Pai -wise Co ela ions (A)
Va iables
1
2
3
4
5
6
7
8
9
10
(1) IEb
1
(2) FRQJ
0.201
1
(3) FRQK
0.210
0.179
1
(4) FRQMS
0.183
0.001
0.001
1
(5) SIZE
0.009
0.139
0.104
0.011
1
(6) MBR
-0.033
-0.156
-0.135
-0.005
-0.366
1
(7) CFO
-0.001
-0.124
-0.124
-0.005
-0.358
0.416
1
(8) SALES
0.001
-0.027
-0.03
-0.002
-0.158
0.157
0.624
1
(9) INVEST
-0.04
-0.019
-0.025
-0.007
-0.034
0.026
0.042
0.134
1
(10) ZSCORE
0.03
0.194
0.148
0.008
0.411
-0.578
-0.466
-0.133
-0.037
1
(11) TNG
-0.001
-0.003
0.01
0.004
0.108
-0.135
-0.088
-0.101
0.009
0.04
(12) LEV
0.001
0.021
0.021
-0.001
0.23
-0.241
-0.125
-0.092
-0.008
0.065
(13) INDUS
0.001
0.036
0.039
-0.008
0.223
-0.174
-0.107
-0.017
-0.012
0.116
(14) OCFS
0.001
0.078
0.063
0.004
0.26
-0.223
-0.173
-0.009
-0.024
0.35
(15) SLACK
-0.001
-0.032
-0.024
-0.001
-0.169
0.134
0.124
0.036
0.004
-0.092
(16) DIV
0.001
0.019
0.022
0.006
0.229
-0.116
-0.063
-0.021
-0.002
0.041
(17) AGE
0.002
0.054
0.052
0.008
0.434
-0.173
-0.214
-0.106
-0.014
0.22
(18) OPCYL
0.005
0.064
0.037
0.001
0.156
-0.148
-0.13
-0.041
-0.018
0.181
(19) LOSS
-0.006
-0.046
-0.06
-0.006
-0.383
0.185
0.189
0.022
0.016
-0.332
Khan, Sa da & Manzoo
299
Table 6: Spli Sample Analysis
Dependen a iable: In es men E iciency (IEb)
Panel A: China, India, Japan, S.Ko ea,
Taiwan and he USA
Panel B: O he Coun ies
Va iables
1
2
3
4
5
6
FRQJ
0.030***
0.0694**
(4.0084)
(2.2523)
FRQK
0.0145*
1.84***
(1.7261)
(2.6991)
FRQMS
0.2673*
14.1***
(1.7775)
(2.642)
Obse a ions
114,387
114,387
114,387
43,521
43,521
43,521
R-sq.
0.1135
0.1467
0.1173
0.1195
0.1894
0.1354
Coun y/Ind./Yea FE
Yes
Yes
Yes
Yes
Yes
Yes
CONTROLS
Yes
Yes
Yes
Yes
Yes
Yes
No es: Fo he able's b e i y, con ol a iables a e omi ed.
FE (Coun y, Indus y and Yea ) panel OLS eg essions a e employed.
-S a s (in pa en heses) clus e ed a i m le el obus o he e oscedas ici y. *** p<0.1, ** p<0.05, * p<0.01
We in es iga e he co ela ion be ween FRQ and IEb by u ilizing Eq. (1), employing
di e en p oxies as compa ed o hose u ilized in he baseline eg essions. We ensu e he
obus ness o ou indings by employing al e na i e measu es o IE and FRQ o mi iga e
any po en ial biases due o use o any p oxy This app oach is used o enhance he eliabili y
and alidi y o ou esul s along wi h consis ency. Ou al e na i e me ic o In es men
E iciency (IEc) is de i ed om Chen e al. (2011), inco po a ing sales g ow h
oppo uni ies and po en ial losses in o he de e mina ion o expec ed in es men le els o
a gi en yea . Simila ly, he al e na i e measu e o Financial Repo ing Quali y (FRQ)
emains consis en . Table 7 explains he esul s using Eq. (1), In Panel A, he al e na i e
measu e o In es men E iciency (IEc) is employed alongside he same h ee FRQ p oxies
u ilized in he baseline eg ession. Panel B, on he o he hand, u ilizes al e na i e measu es
o Financial Repo ing Quali y (FRQagg) in conjunc ion wi h he al e na i e p oxy o
in es men e iciency (IEc). Ac oss all p oxies he indings consis en ly demons a e a
signi ican and posi i e associa ion be ween he al e na i e measu e o FRQ and IEc,

Financial Repo ing Quali y and In es men E iciency
300
Table 7: Al e na i e Measu es o Baseline Models
Panel A: Al e na i e
measu es o IE
Panel B: Al e na i e
measu es o FRQ and
IE:
Al e na e
measu e
IEc
IEc
IEc
IEc & FRQagg
Va iables
1
2
3
4
FRQJ
0.1807*
**
(2.9486)
FRQK
1.4173*
*
(2.3102)
FRQMS
8.4901*
*
(2.3677)
FRQagg
0.2114***
(4.0725)
Obse a ions
157,908
157,908
157,908
157,908
R-squa ed
0.1208
0.1853
0.1828
0.1715
Coun y FE
Yes
Yes
Yes
Yes
Indus y FE
Yes
Yes
Yes
Yes
Yea FE
Yes
Yes
Yes
Yes
CONTROLS
Yes
Yes
Yes
Yes
No es: Fo he able's b e i y, con ol a iables a e omi ed.
FE (Coun y, Indus y and Yea ) panel OLS eg essions a e employed.
-S a s (in pa en heses) clus e ed a i m le el obus o he e oscedas ici y. *** p<0.1, ** p<0.05, * p<0.01
4.5 Endogenei y Tes
Ou ini ial analysis ope a es unde he assump ion ha FRQ in luences in es men
e iciency (IEb), suppo ed by a solid heo e ical amewo k and a comp ehensi e a ay o
con ol and auxilia y a iables. Howe e , in his sec ion, we conside he possibili y ha
he obse ed ela ionships be ween FRQ and IEb may be a ec ed by he endogenous na u e
o FRQ. To add ess his conce n, we employ a Two-S aged Leas Squa es (2SLS)
app oach.
P e ious esea ch, as demons a ed by s udies like Chin, Chen and Hsieh (2009), Huang
(2022) and La Po a e al. (1997), ha e ex ensi ely documen ed ha coun ies wi h
common-law ju isdic ions ypically p o ide a mo e conduci e ins i u ional en i onmen
o business ope a ions. Addi ionally, esea ch by Dayanandan, Donke , I ano and
Ka ahan (2016) e eals ha hese ju isdic ions show high inancial anspa ency le els and
disclosu es, indica i e o s onge FRQ as opposed o ci il-law ju isdic ions. Le e aging
on his knowledge, we in oduce an ins umen al a iable e med "IPcc" o he s udy
encompassing hi y-six ma ke s om eme ging, on ie , and o he ca ego ies apa om
he main de eloped ma ke s. This indica o a iable is assigned a alue o 1 o common-
law ju isdic ions and 0 o ci il-law ju isdic ions. In he i s -s age o ou analysis, we
eg ess he agg ega e measu e o FRQ (FRQagg) on IPcc and calcula e he p edic ed alue
o FRQp. This allows us o cap u e he a ia ion in FRQ a ibu able o legal o igins, hus
mi iga ing po en ial endogenei y conce ns. Subsequen ly, in he second-s age, we use
FRQp in he baseline analysis o assess i s impac on in es men e iciency.
Khan, Sa da & Manzoo
301
In he wo-s age analysis, as depic ed in Table 8, we ind ha ou esul s s ay obus ac oss
all ou panels, indica ing ha he ela ionship be ween FRQ and in es men e iciency
pe sis s e en a e add essing po en ial endogenei y issues.
Table 8: 2SLS Es ima ion (A)
Panel A: Full Sample
Panel B: De eloped
Coun ies
S age 1
S age 2
S age 1
S age 2
VARIABLES
FRQagg
IEb
FRQagg
IEb
1
2
3
4
IPcc
0.693***
0.997***
(6.084)
(4.1177)
FRQp
2.856***
2.467***
(2.7836)
(5.5493)
Obse a ions
157,908
157,908
78,997
78,997
R-sq.
0.1332
0.1246
0.1313
0.1213
Coun y/Ind./Yea FE
Yes
Yes
Yes
Yes
CONTROLS
Yes
Yes
Yes
Yes
Table 8: 2SLS Es ima ion (B)
Panel C: Eme ging
Coun ies
Panel D: F on ie and
O he Coun ies
S age 1
S age 2
S age 1
S age 2
VARIABLES
FRQagg
IEb
FRQagg
IEb
5
6
7
8
IPcc
0.052***
0.027***
(7.9984)
(2.8979)
FRQp
1.409**
0.026**
(2.3492)
(2.5197)
Obse a ions
75,281
75,281
3,630
3,630
R-sq.
0.0907
0.0948
0.0826
0.1901
Coun y/Ind./Yea FE
Yes
Yes
Yes
Yes
CONTROLS
Yes
Yes
Yes
Yes
No es: Fo he able's b e i y, con ol a iables a e omi ed.
FE (Coun y, Indus y and Yea ) panel OLS eg essions a e employed.
-S a s (in pa en heses) clus e ed a i m le el obus o he e oscedas ici y. *** p<0.1, ** p<0.05, * p<0.01
5. Conclusion and Recommenda ions
Ou s udy igo ously examined he impac o Financial Repo ing Quali y (FRQ) on
in es men e iciency ac oss a subs an ial sample o 18,231 publicly lis ed i ms whe e
esea ch in he domain o eme ging, on ie , and o he ma ke s is ela i ely spa se, wi h
ew exis ing s udies explo ing his mul i ace ed landscape only in de eloped ma ke s.
Spanning he pe iod om 2003 o 2022, ou analysis encompassed a di e se sample o
Financial Repo ing Quali y and In es men E iciency
302
hi y-six coun ies, including de eloped, eme ging, on ie , and o he ma ke s. The
eg ession ou comes e ealed ha heigh ened inancial epo ing quali y no only boos s
in es men e iciency wi hin de eloped coun ies bu also ou sp eads i s bene icial impac
on he eme ging, on ie , and o he ma ke segmen s. This ou come is consis en wi h
exis ing li e a u e, ea i ming FRQ's ole as a moni o ing ool ha mi iga es agency issues,
consequen ly aiding in making op imal in es men choices. Fu he in es iga ion in o o e -
and unde -in es men scena ios wi hin ou sample yielded esul s consis en wi h hose
obse ed in he o e a ching in es men e iciency model, he eby s eng hening he in luence
o FRQ ac oss a spec um o ma ke s, including de eloped, eme ging, on ie , and o he s.
Ou s udy adds aluable insigh s o he in es men e iciency li e a u e by highligh ing he
subs an ial and posi i e impac o heigh ened FRQ on in es men e iciency ac oss a
di e se ange o publicly lis ed i ms, encompassing de eloped, eme ging, on ie , and
o he coun ies. No ably, ou indings esona e wi h p e ious esea ch conduc ed by
Houcine e al. (2022) on publicly lis ed i ms in de eloped coun ies and by Khan e al.
(2024) in eme ging and on ie coun ies. This consis ency in esul s unde sco es he
obus ness o he ela ionship be ween FRQ and in es men e iciency, e en in se ings
cha ac e ized by lowe le els o FRQ, such as on ie and o he ma ke s. Despi e he
inhe en complexi y o including bo h common-law and ci il-law economies in he selec ed
sample, he indings o he s udy endu e cong uence wi h hose obse ed in de eloped
economies, u he s eng hening he alidi y o ou esul s.
This s udy holds subs an ial implica ions wi hin he ins i u ional con ex o eme ging and
on ie economies, encompassing hi y-six coun ies wi h di e se legal amewo ks.
These implica ions a e b oad, a ec ing in es o s e alua ing i ms' in es men e iciency,
manage s de eloping app op ia e epo ing and in es men s a egies, and policymake s
o mula ing e ec i e na ional and in e na ional policies ela ed o accoun ing and inancial
epo ing o publicly lis ed companies. Ou esea ch p o ides aluable insigh s ha could
mo i a e i ms o enhance hei e hical s anda ds and adhe e o egula ions mo e s ic ly,
hus con ibu ing o he e icien unc ioning o he ma ke by educing agency issues o
mo al haza d o ad e se selec ion.
Ne e heless, ou s udy has i s limi a ions ha wa an acknowledgemen . This s udy
ocuses o explo e he connec ion be ween FRQ and in es men e iciency in ansna ional
en i onmen s. Ne e heless, i is concei able ha he coun y-le el co po a e go e nance,
inancial cons ain s aced by he i ms, isk- aking inclina ion o he manage s and o he
ac o s also play a ole in he s a ed ela ionship. Hence, upcoming esea ch s udies could
in es iga e hese ac o s and hei po en ial influence on he ela ionship be ween FRQ and
in es men e iciency.
Acknowledgemen
The au ho s acknowledge he aluable inpu s o he pa icipan s o he in e na ional
con e ence i led ‘ICBELLP-2024’ a anged by Eu asia Resea ch. The eedback has
signi ican ly imp o ed he quali y o his esea ch pape .
Khan, Sa da & Manzoo
303
Resea ch Funding
The au ho s ecei ed no in e nal esea ch g an o ex e nal unding o his esea ch s udy.
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