Earning Quality and Investment Efficiency; Do Board Characteristics Matter? Evidence from Tehran Stock Exchange

Document Type: Original Article

Authors

1 Ph.D. Candidate, Department of Finance, Faculty of Management, Islamic Azad University, Science Research & Technology Branch, Tehran, Iran.

2 MSc., Department of Finance, Faculty of Petroleum, Petroleum University of Technology, Tehran, Iran.

3 B.S., Department of Accounting, Faculty of Petroleum, Petroleum University of Technology, Tehran, Iran.

10.22034/ijf.2020.208476.1086

Abstract

This study postulates the relationships between earning quality and investment efficiency among Tehran Stock Exchange-listed companies with an emphasis on the moderating role of board characteristics including independence, the duality of executives and the financial expertise of members. The research is applied in terms of purpose and takes a correlative-descriptive approach. The statistical population is comprised of TSE listed companies from 2008 to 2018 and, the final sample consisting of 78 companies was selected using systematic (purposeful) elimination. To test the hypotheses, two regression models were estimated using Ordinary Least Squares method through Eviews software. The empirical results revealed a positive and significant relationship between the quality of earning and investment efficiency in TSE publicly-traded companies. As well as, the board members' independence and financial background can significantly exaggerate such a relationship. Based on our findings, capital market legislators, regulators, and policymakers may reinforce the governance role of the board of directors in monitoring the behavior of firms, and as a result, increase the efficiency of allocating capital among companies listed in TSE and also in macroeconomic levels. The findings can persuade corporate shareholders to pay more attention to the degree of independence and expertise of their board of directors to gain more return on their investment opportunities.

Keywords


Aghaei, M. A. A. & Etemadi, Hussein.(2009). Characteristics of corporate governance and the information content of earnings in Tehran Stock Exchange, with emphasis on the role of earnings management. Journal of Management Sciences, (16), 53-27 (in Persian).
Baik, B. O. K., Farber, D. B., & Lee, S. A. M. (2011). CEO ability and management earnings forecasts. Contemporary accounting research, 28(5), 1645-1668.
Ball, R., & Shivakumar, L. (2005). Earnings quality in UK private firms: comparative loss recognition timeliness. Journal of accounting and economics, 39(1), 83-128.
Ball, R., Jayaraman, S. & Shivakumar, L. (2012). Audited financial reporting and voluntary disclosure as complements: a test of the confirmation hypothesis. Journal of accounting and economics, 53 (2), 136-166.
Beaver, W. H. (1989). The information content of annual earnings announcements. Journal of accounting research, 67-92.
Beasley, M. S. (1996). An empirical analysis of the relation between the board of director composition and financial statement fraud. Accounting review, 443-465.
Berle, A., & Means, G. (1932). The modern corporation and private property. Routledge.
Biddle, G. C., & Hilary, G. (2006). Accounting quality and firm-level capital investment. The accounting review, 81(5), 963-982.
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.
Bonn, I., Yoshikawa, T., & Phan, P. H. (2004). Effects of board structure on firm performance: A comparison between Japan and Australia. Asian Business & Management, 3(1), 105-125.
Brogaard, J., Li, D., & Xia, Y. (2017). Stock liquidity and default risk. Journal of Financial Economics, 124(3), 486-502.
Bushman, R. M., & Smith, A. J. (2003). Transparency, financial accounting information, and corporate governance. Financial Accounting Information, and Corporate Governance. Economic Policy Review, 9(1).
Chang, J. C., & Sun, H. L. (2008). The relation between earning in formativeness, earnings management and corporate governance in the pre-and post-SOX periods. In 2008 AAA Mid-Atlantic Region Meeting (pp. 24-26).
Chang, J.,Li, Q., & Wang, T. (2015). Financial reporting quality and corporate investment efficiency: Chinese experience. Nankai Business Review International, 1(2), 197-213.
Chen, F., Hope, O. K., Li, Q., & Wang, X. (2011). Financial reporting quality and investment efficiency of private firms in emerging markets. The accounting review, 86(4), 1255-1288.
Chen, S., Sun, Z., Tang, S., & Wu, D. (2011). Government intervention and investment efficiency: Evidence from China. Journal of Corporate Finance, 17(2), 259-271.
Chen, C., Kim, J. B., & Yao, L. (2017). Earnings smoothing: Does it exacerbate or constrain stock price crash risk? Journal of Corporate Finance, 42, 36-54.
Cheng, M., Dhaliwal, D., & Zhang, Y. (2013). Does investment efficiency improve after the disclosure of material weaknesses in internal control over financial reporting? Journal of Accounting and Economics, 56(1), 1-18.
Chircop, J., Collins, D. W., & Hass, L. H. (2018). Accounting comparability and corporate innovative efficiency. Available at SSRN 2810448.
Dalton, C. M., & Dalton, D. R. (2005). Boards of directors: Utilizing empirical evidence in developing practical prescriptions. British Journal of management, 16, S91-S97.
Dechow, P. M., & Dichev, I. D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The accounting review, 77(s-1), 35-59.
Fama, E. F., & MacBeth, J. D. (1973). Risk, return, and equilibrium: Empirical tests. Journal of political economy, 81(3), 607-636.
Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The journal of law and Economics, 26(2), 301-325.
Francis, J. R., Huang, S., Khurana, I. K., & Pereira, R. (2009). Does corporate transparency contribute to efficient resource allocation? Journal of Accounting Research, 47(4), 943-989.
Grace Jr, H. S., & Haupert, J. E. (2003). Financial literacy. The CPA Journal, 73(6), 8, 12-27.
Hashemi, S.A., Samadi, S. & Hadian, R. (2014). The Effect of Financial Reporting Quality and Debt Maturity on Investment Efficiency. Empirical Studies in Financial Accounting, 11 (44), 117-143 (in Persian). 
Hassas Yeganeh,Y., Marfou, M. & Naghdi, M. (2017). The Relation between Earnings Forecast Accuracy and Investment Efficiency. Empirical Studies in Financial Accounting, 14 (54), 51-72 (in Persian).
Healy, P. M., & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of accounting and economics, 31(1-3), 405-440.
Hillman, A. J., Lynall, M. D. &Golden, B. R. (2000). Board composition from adolescence to maturity: A multitheoretic view. Academy of management review, 28(3), 416-431.
Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. the Journal of Finance, 48(3), 831-880.
Kaplan, S. N., & Minton, B. A. (1994). Appointments of outsiders to Japanese boards: Determinants and implications for managers. Journal of Financial Economics, 36(2), 225-258.
Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of accounting and economics, 33(3), 375-400.
Lambert, R., Leuz, C., & Verrecchia, R. E. (2005). Accounting information, disclosure, and the cost of capital. Journal of accounting research, 45(2), 385-420.
Modarres, A. & Hesarzadeh, R. (2008). Quality of Financial Reporting and Investment Efficiency.  Quarterly Jornal of Securities Exchange, 1(2), 116-85 (in Persian).
Montaghemi, A. (2013). Reflection on the Information Efficiency of the Tehran Stock Exchange. International Conference on Economics, Accounting, Management and Social Sciences, University of Szczecin, Poland (in Persian).
Nahandi, Y., Ghaderi, S. & Nahandi, R. (2013). The Impact of Accounting Information Transparency on Investment Inefficiency in Companies Listed in Tehran Stock Exchange. Journal of Economic Research and Policies, 21 (68), 65-82 (in Persian).
Nahandi, Y. & Taghizadeh, V. (2013). The Relationship between Audit Quality and Investment Efficiency. Accounting and Auditing Reviews, 20 (2),19-42 (in Persian).
Nikbakht, M. R., Seyyedi, S. A., & Hashem al-Husseini, R. (2010). Investigating the Impact of Board Characteristics on Corporate Performance. Journal of Accounting Advances, 3 (58), 251-270, (in Persian).
Peasnell, K. V., Pope, P. F., & Young, S. (2000). Accrual management to meet earnings targets: UK evidence pre-and post-Cadbury. The British Accounting Review, 32(4), 415-445.
Petersen, M. A. (2009). Estimating standard errors in finance panel data sets: Comparing approaches. The Review of Financial Studies, 22(1), 435-480.
Rahnamaye Roudposhti, F., Madanchi, M. & Babalouyan, S. (2017). Testing the informational Efficiency and Rational Bubble in TSE and its Subsections Using Variance Ratio Test and Stationary Test of Price- Dividend Ratio. Financial Knowledge of Securities Analysis, 5, 2(14), 59-75 (in Persian).
Richardson, S. (2006). Over-investment of free cash flow. Review of accounting studies, 11(2-3), 159-189.
Saghafi, A., Blue, G. & Mohammadian, M. (2011). The Association between Accounting Information Quality, Overinvestment and Free Cash Flow. Journal of Accounting Advances, 3(2), 37-63 (in Persian).
Saghafi, A. & Motamedi, M. (2011). Relation between Audit Quality and Investment Efficiency in Firms with High Investment Opportunities. Journal of Financial Accounting Research, 4(1), 1-14 (in Persian).
Seddighi, R. (2013). The Relationship between Board Structure and Information Content of Accounting Earnings. Empirical Studies in Financial Accounting, 9 (33), 99-125 (in Persian).
Soleimani, G. & Farshi, Z. (2012). The Impact of Bank Financing and Tax Goals on the Relationship between Financial Reporting Quality and Investment Efficiency.  Journal of Accounting Knowledge, 3 (11), 57-83 (in Persian).
Sulong, Z., & Nor, F. M. (2010). Corporate governance mechanisms and firm valuation in Malaysian listed firms: A panel data analysis. Journal of Modern Accounting and Auditing, 6(1), 1.
Volpe, R., & Woodlock, P. (2008). A survey of board financial literacy. Corporate Finance Review, 12(5), 16.
Zeng, Y., & Lu, Z. F. (2006). The relationship between disclosure quality and cost of equity capital of listed companies in China. Economic Research Journal, 2, 69-79.
Zhai, J., & Wang, Y. (2016). Accounting information quality, governance efficiency and capital investment choice. China Journal of Accounting Research, 9(4), 251-266.
Zhong, Z., & Hanwen, C. (2008). Accounting information transparency and resources allocation efficiency: theory and empirical evidence. Accounting Research, 12, 56-62.