Does financial reporting quality affect the investment efficiency of listed textile sector firms in Pakistan? A myth or reality

Abstract

The study investigates the relationship between financial reporting quality and investment efficiency in Textile sector firms listed on the Pakistan Stock Exchange, due to the reason of being the highest-ranked sector with a maximum number of listed firms in Pakistan. We use financial reporting quality as an independent variable, investment efficiency as a dependent variable, and the firm’s annual cash, assets tangibility, and return on assets as control variables. We analyse 100 randomly selected firms for the period 2005 to 2019. The study applies various estimators, namely Pooled OLS, Fixed Effects, and Random Effects to identify which model better predicts results. The results demonstrate that firm’s financial reporting quality and ROA have a positive significant effect on the investment efficiency of these selected firms in all three models, but Random Effects Model estimates better coefficients than the counterparts. While the firm’s annual cash predicts a positive insignificant effect on the investment efficiency in the case of all competing models. Asset’s tangibility shows a negative significant effect on the investment efficiency of these firms. The study will help the academicians in their researches, decision-makers, and top management of this particular manufacturing sector in getting insight into framing and formulating their financial strategies.