Impact of financial reporting quality on labour investment efficiency for Indian firms

Leela Joshi and Soma Dey

Afro-Asian Journal of Finance and Accounting, 2025, vol. 15, issue 4, 530-555

Abstract: This paper discusses the potential role of financial reporting quality (FRQ) in affecting investments in labour, an important factor of production that has been largely overlooked in the literature, especially for Indian firms. Using a dataset consisting of 366 non-financial Indian companies listed on the BSE500 Index, we find that higher FRQ is associated with higher labour investment efficiency (LIE). Further, we find that FRQ is strongly associated with overinvestment by firms, which suggests that FRQ mitigates moral hazard problems arising from information asymmetries. On the other hand, FRQ is found to have no significant effect on underinvestment for firms facing financing constraints. We also find that high-quality financial reporting mitigates abnormal net hiring by smaller firms while the effect is insignificant for larger firms. The results indicate that FRQ can play a significant role in mitigating investment inefficiencies arising out of informational asymmetry for emerging markets like India.

Keywords: financial reporting quality; FRQ; labour investment efficiency; LIE; information asymmetry; overinvestment; underinvestment. (search for similar items in EconPapers)
Date: 2025
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