Motivated monitoring by institutional investors and firm investment efficiency

We find that motivated monitoring by institutional investors mitigates firm investment inefficiency, estimated by Richardson's (2006) approach. This relation is robust when using the annual reconstitution of the Russell indexes as exogenous shocks to institutional ownership during the period 1995–2015 and after classifying institutional ownership by institution type. We also show that closer monitoring mitigates the problem of both over‐investing free cash flows and under‐investment due to managers’ career concerns. Finally, we document that the effectiveness of the monitoring by institutional investors appears to increase monotonically with respect to the firm's relative importance in their portfolios.     

Litigation risk,accounting quality,and investment efficiency

This paper examines the moderating effect of litigation risk on the relationship between accounting quality and investment efficiency. We use directors’ and officers’ (D&O) liability insurance as a proxy for litigation risk, accruals quality for accounting quality, and investment cash flow sensitivity for investment efficiency (Biddle & Hilary, 2006; Hovakimian & Hovakimian, 2009). Using Canadian data from 1998 to 2008, we show that firms with higher D&O insurance coverage exhibit lower quality accruals. Moreover, the previously documented negative association between accruals quality and investment cash flow sensitivity is stronger (weaker) when abnormal D&O coverage is low (high), suggesting that the role of accounting quality in facilitating investment efficiency is conditional upon observable litigation risk.     

Auditor specialization,accounting information quality and investment efficiency

This study is examined how the auditor specialization moderates the effect of accounting information quality on investment efficiency, i.e., whether the effect of accounting information quality on investment efficiency is increasing or decreasing with the presence of the specialist auditor.The reached result reveals that the accounting information quality appears to help decrease the overinvestment problem. Similarly, the auditor specialization has been discovered to help greatly in improving investment efficiency, while reducing the underinvestment problem. We further find that the accounting information quality and the auditor specialization are two mechanisms with some degree of substitution in enhancing investment efficiency. The accounting information quality is positively associated with investment efficiency for firms whose auditor is an industry specialist.In addition, to check the robustness of the main results, this paper investigates the causal relationships between investment efficiency, auditor specialization and accounting information quality from the dynamic simultaneous-equation models.     

Financial reporting quality,debt maturity and investment efficiency

This study, conducted with a sample of Spanish listed companies during the period 1998–2008, examines the role of financial reporting quality and debt maturity in investment efficiency. The results show that financial reporting quality mitigates the overinvestment problem. Likewise, lower debt maturity can improve investment efficiency, reducing both overinvestment and underinvestment problems. We further find that financial reporting quality and debt maturity are mechanisms with some degree of substitution in enhancing investment efficiency: firms with lower (higher) use of short-term debt, exhibit higher (lower) financial reporting quality effect on investment efficiency.     

Accounting information quality,governance efficiency and capital investment choice

This paper examines the relationship between accounting information quality and capital investment choice from the perspective of accounting information’s gover...     

Earnings quality: Some evidence on the role of auditor tenure and auditors’ industry expertise

Prior studies suggest that auditors with short tenure are associated with lower earnings quality because of the lack of client-specific knowledge and/or low balling. In this study, we examine whether industry specialization of auditors and low balling affect the association between auditor tenure and earnings quality. We find that the association between shorter auditor tenure and lower earnings quality is weaker for firms audited by industry specialists compared to non-specialists. In addition, we do not find results consistent with the low balling explanation.     

Venture capital investment and institutional factors: Evidence from China

This paper examines how venture capital (VC) investment and institutional factors affect the performance of VC-backed companies in China. Compared with non-VC-backed companies, we find that VC-backed companies slightly underperform in profitability but have considerably higher market value. Furthermore, VC investment does not help companies mitigate the negative impact of institutional factors on profitability; however, it conveys beneficial effects that help companies moderate the negative impact on market value. We also provide evidence that the impact of VC investment and institutional factors is more pronounced for non-state-owned companies, companies with poor corporate governance, and companies with higher research and development investment.     

The role of internal corporate governance mechanisms on default risk: A systematic review for different institutional settings

Recent financial downturns, characterized by the significant failures of firms, have revealed the need to control credit risk. Latest literature has shown that weak corporate governance structures are related to high levels of default risk, leading to financial instability. In this context, we aim to summarize the literature that focuses on the role that internal corporate governance plays in the credit risk of firms, specifically considering three corporate governance components: ownership structure, board structure and financial stakeholders’ rights and relations. Additionally, we analyse whether the effectiveness of the internal mechanisms depends on particular key factors, especially the institutional setting and the type of mechanisms considered. Finally, new lines of research are identified for future research.     

Firm-specific information and the efficiency of investment

In the three-year period following stock market liberalizations, the growth rate of the typical firm's capital stock exceeds its pre-liberalization mean by an average of 4.1 percentage points. Cross-sectional changes in investment are significantly correlated with the signals about fundamentals embedded in the stock price changes that occur upon liberalization. Panel-data estimations show that a 10-percentage point increase in a firm's expected future sales growth predicts a 2.9- to 3.5-percentage point increase in the growth rate of its capital stock. Country-specific changes in the cost of capital drive changes in investment but firm-specific changes in the cost of capital do not.     

Earnings management and earnings quality

Viewing the detection of earnings management from the perspective of a crime scene investigator sheds new light on prior research on earnings management and its close relative, earnings quality. The works of Ball and Shivakumar [2008. Earnings quality at initial public offerings. Journal of Accounting and Economics, in press.] and Teoh et al. [1998. Earnings management and the subsequent market performance of initial public offerings. Journal of Finance 53, 1935–1974.] are used to illustrate the application of seven components of a crime scene investigation to earnings management research.     

论创建合格的外国机构投资者制度

设立中外合作投资基金是适应经济全球化条件下中国证券市场对外开放需要的重要战略选择。基于资本安全问题，我们要创建合格的外国机构投资者制度，实现中外合作投资基金与中国证券市场的良性互动发展。     

Foreign institutional investment horizon and earnings management: Evidence from around the world

This paper investigates whether and how the investment horizon relates to foreign institutional monitoring in constraining the self-interested managerial use of earnings management for a sample of firms from 29 countries. We find that equity ownership by long-term foreign institutional investors, irrespective of the strength of institutional controls in their home countries, is associated with lesser earnings management. Accounting for the significance of information asymmetry in earnings management and the ability of long-term foreign institutional investors to mitigate the information disadvantage associated with cross-border equity investments, we find that the constraining effect is stronger in firms with weaker information environments. Finally, using multiple proxies for the country- and firm-level agency, we find that monitoring by long-term, rather than short-term, foreign institutional investors is significantly effective in limiting earnings management in environments of severe agency conflicts. Overall, our findings draw attention to the heterogeneity in the monitoring role played by foreign institutional investors in influencing the financial reporting quality.     

The effect of financial reporting quality on corporate investment efficiency: Evidence from the Tunisian stock market

Positive Accounting Theory (Watts and Zimmerman, 1978) stipulates that financial reporting has two dimensions: market signaling and monitoring managerial behaviors. Through these signaling and stewardship means, a better financial reporting quality would have significant economic consequences in terms of efficient resources allocation, which results in improving firms’ investment decision. In this paper, we examine the impact of financial reporting quality on corporate investment efficiency. Our sample is based on 25 Tunisian listed companies for the period 1997–2013. The findings confirm that some characteristics of the financial information, namely, reliability and smoothness, appear to increase the investment inefficiency, while others, i.e., conservatism and relevance, seem have no significant effect on investment decisions. We attribute such results mainly to the contextual specificities of the Tunisian environment, such as, the institutional bodies and settings, the cultural values and some characteristics of the corporate governance system.     

Earnings expectations and the quality of financial services

Using complaint data filed by consumers with the Consumer Financial Protection Bureau against financial institutions, we show that banks receive, on average, 13.3% more customer complaints in the quarter immediately after they narrowly beat analysts’ earnings forecasts. The effect is mainly driven by banks’ attempts to reduce their non-interest expenses to beat earnings benchmarks. The relationship is stronger when bank CEOs receive a greater proportion of incentive-based compensation. Overall, our paper demonstrates how capital market incentives exacerbate shareholder–customer conflicts.     

Securitization and aggregate investment efficiency

This paper studies the efficiency of competitive equilibria in economies where the expansion of investment is facilitated by securitization. We show that the use of securitization is generally associated with constrained inefficient aggregate investment, thereby potentially justifying regulatory intervention in markets for securitized assets. We examine the effectiveness of two real-world policy instruments to address this inefficiency: ex-ante capital / leverage requirements, as well as skin-in-the game (retention) requirements. We find that leverage/capital restrictions can increase welfare in our environment, but that forcing originators to hold additional skin-in-the game is not welfare improving.     

Media coverage and investment efficiency

We examine the effect of media coverage on firm-level investment efficiency. We find that media coverage reduces under-investment but increases over-investment. The negative effect of media coverage on under-investment is more pronounced in firms affected by greater information asymmetry and poorer corporate governance. The positive effect of media coverage on over-investment is driven by media-induced CEO overconfidence. Additional results show that both investment- and non-investment-related news coverage decrease under-investment, while non-investment-related news coverage is more influential in increasing over-investment. In general, higher news optimism is associated with less under-investment but more over-investment. Moreover, media coverage affects investment efficiency through its information dissemination rather than information creation function. Collectively, our results suggest that firms’ media visibility promotes more over-investment than under-investment.     

Earnings quality and firm valuation: international evidence*

This study uses a sample of over 7000 firms in 38 countries to investigate the relation between firm valuation and earnings quality. We find a positive and significant relation between firm valuation and an aggregate earnings quality measure based on seven earnings attributes (accruals quality, persistence, predictability, smoothness, value relevance, timeliness, and conservatism). This relation is particularly strong for firms with greater investment opportunities and more need for external finance, and for firms in low investor protection countries. Thus, firms are able to compensate for a weak legal environment by adopting higher earnings quality standards, particularly when they need to gain access to global capital markets. Overall, our findings suggest that firms with higher earnings quality are valued more highly in stock markets, supporting the idea that investors require a premium for the information risk associated with lower‐quality earnings.     

Earnings quality and corporate cash holdings

Poor earnings quality exacerbates information asymmetry between internal and external stakeholders of a firm. Agency considerations then persuade investors to discount the value of corporate cash holdings out of concern about the inappropriate use of funds. In this study, we show that poor earnings quality has a negative impact on the value of corporate cash holdings and a positive impact on the level of cash reserves. We find that the negative effect of poor earnings quality either neutralizes or more than offsets the positive effect of excess cash on firm value. Our results are robust to several measures of earnings quality and model specifications.     

Short-term investment and the informational efficiency of the market

A dynamic finite-horizon market for a risky asset with a continuumof risk-average heterogeneously informed investors and a risk-neutralcompetitive market-making sector is examined. The article analyzesthe effect of investors' horizons on the information contentof prices. It is shown that short horizons enhance or reduceaccumulated price informativeness depending on the temporalpattern of private information arrival. With concentrated arrivalof information, short horizons, reduce final price informativeness;with diffuse arrival of information, short horizons enhanceit. In the process a closed-form solution to the dynamic equilibriumwith long-term investors is derived.     

Government intervention and investment efficiency: Evidence from China

The extant corporate investment literature has documented that information asymmetry and agency conflicts between managers and outside investors prevent firms from making optimal investment decisions. In this study, we investigate whether government intervention, as another form of friction, distorts firms' investment behavior and leads to investment inefficiency. Using Chinese data, we test this by measuring government intervention at two different levels. First, we compare investment efficiency between SOEs and non-SOEs. We find that the sensitivity of investment expenditure to investment opportunities is significantly weaker for SOEs. Second, we measure government intervention by whether a firm is politically connected through the employment of top executives with a government background. We find that political connections significantly reduce investment efficiency in SOEs. However, we do not find such evidence in non-SOEs. Taken together, our findings suggest that government intervention in SOEs through majority state ownership or the appointment of connected managers distorts investment behavior and harms investment efficiency.