The Effect of Financial Reporting Quality on Financing and Investment

Abstract

Objective - This study examines the effect of financial reporting quality on financing and investment of 15 large Indonesian companies that may still be under-investing in relation to its regional peers. Methodology/Technique - This research uses the quantitative research technique which involves field search, library research and statistical methods. Findings - The results suggest that (1) financial reporting quality has negative effect on financing (2) financial reporting quality has positive effect on investment among companies with higher likelihood of over-investing and negative effect on investment among those with higher likelihood of under-investing. Novelty - This research is complementary to previous researchers because they use financial reporting data of companies located in the United States whose domestic capital markets remain the largest and deepest globally. This might affect the degree of information asymmetry and financing frictions that companies face and hence, lead to an upward bias of the effect. Meanwhile, this research is conducted in Indonesia whose non-financial companies obtain nearly 50% of their financing from abroad via loans, bonds, and other credit. Type of Paper - Conceptual Type of Paper - Financial reporting quality; Financing; investment; Likelihood of over-investing; Likelihood of under-investing.