Author: Gary Biddle
The problem
What ensures that firms invest in the right projects?
Even well-designed governance structures rely on something more basic: information. When information is limited or opaque, it becomes difficult for investors and stakeholders to assess decisions and hold managers accountable.
In such settings, firms may overinvest in low-return projects or underinvest in valuable opportunities.
The idea
This research examines whether improving the quality of financial reporting can strengthen governance by improving how firms make investment decisions.
High-quality reporting reduces information asymmetry between managers and stakeholders. By making firm performance more transparent, it enables more effective monitoring and constrains managerial discretion.
The central insight is that governance can operate through the information environment itself.
What we find
Firms with higher-quality financial reporting invest more efficiently. They are less likely to overinvest in unprofitable projects and less likely to miss valuable investment opportunities.
Better reporting sharpens external scrutiny and improves internal decision-making. Managers face stronger discipline when their actions are more visible and easier to evaluate.
From information to discipline
When financial reporting is more transparent, managerial decisions are subject to closer scrutiny. This reduces the scope for empire building and other forms of inefficient investment.
Firms respond by aligning investment choices more closely with underlying economic opportunities. In this way, information becomes a mechanism of governance, shaping behaviour even in the absence of direct intervention.
Policy implications
Improving financial reporting quality can strengthen governance indirectly by enhancing transparency and accountability. A stronger information environment allows markets and stakeholders to play a more effective monitoring role.
The bottom line
Corporate governance does not rely on oversight alone. It depends on whether decision-making is visible and understandable.
By improving the quality of financial reporting, firms create the conditions for better monitoring, stronger discipline, and more efficient investment.
Biddle, G. C., Hilary, G., & Verdi, R. S. (2009). How does financial reporting quality relate to investment efficiency?. Journal of accounting and economics, 48(2-3), 112-131.
DOI: 10.1016/j.jacceco.2009.09.001
Sustainable Development Goals
We align our research activity with the United Nations' Sustainable Development Goals (SDGs).