The impact of corporate governance and IFRS on the relationship between financial reporting quality and investment efficiency in a continental accounting system

Abstract

PurposeThe purpose of this paper is to investigate whether Financial Reporting Quality (FRQ), Corporate Governance and IFRS affect investment efficiency of French listed companies.Design/methodology/approachBased on a sample of 125 French firms listed on the CAC All Tradable index between 2008 and 2017, the study uses Feasible Generalized Least Squares (FGLS) regressions to examine the relationship between FRQ and firms' investment efficiency.FindingsThe findings show that FRQ plays a role in reducing overinvestment and does not affect underinvestment, suggesting that in a code-law country, informal and personal relationships tend to replace the role of financial reports in mitigating information asymmetry. The results also reveal that the relationship between FRQ and investment efficiency increases with better corporate governance and with the implementation of IFRS. However, the results provide no evidence between incentives to minimize profits for tax purposes and firms' underinvestment and continues to be negative for overinvesting companies that have more incentives to manage their earnings for tax purposes.Research limitations/implicationsOur study has some limitations. First, we only examine listed firms, so the results cannot be generalized to unlisted companies that represent the vast majority of French economic activity. Second, this research does not distinguish between government companies and private companies. The two types of companies have different governance mechanisms, financial reporting, disclosure environment and concentration of ownership.Practical implicationsThis study suggests that in a code-law country with weak investor protection, FRQ acts as a governance mechanism by mitigating asymmetric information and improving firms' investment decisions.Originality/valueThe relationship between FRQ and investment efficiency has been widely examined for companies in “common law” countries. This study extends the scarce evidence of this relation to companies in a code-law country. It also builds on previous research by introducing new factors never discussed before that could change this relationship, namely corporate governance, IFRS implementation and tax purposes.