Earnings quality and investment efficiency: the role of the institutional settings

Yasean A. Tahat (), Ahmed H. Ahmed and David Power
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Yasean A. Tahat: Gulf University for Science and Technology
Ahmed H. Ahmed: University of Dundee
David Power: University of Dundee

Review of Quantitative Finance and Accounting, 2022, vol. 58, issue 3, No 13, 1277-1306

Abstract: Abstract The current study examines the association between earnings quality (EQ) and investment efficiency (IE) using the conditional effect of legal origin. Further, we assess the influence of the institutional ownership (IOW) on the relationship between EQ and IE within different legal environments, using a sample of 22,446 firm-year observations from the US, the UK, Germany and Japan over the period of 2001–2018. In general, the results provide cross-country evidence that a higher EQ enhances IE. Further, the results indicate that higher EQ can mitigate overinvestment and underinvestment problems by ensuring that firms move toward their optimal level of investment. In addition, the findings reveal that a country’s legal environment affects IE with EQ having a stronger association with IE in common law countries as compared to code law economies. In terms of the conditional role of IOW, the findings illustrate that the effect of IOW on the relationship between EQ and IE varies within different legal origins. The results are robust to alternative measures for the main variables examined. This study provides policy implications for investors, managers, regulators, and theorists about the role of the institutional settings on the relation between certain properties of EQ and IE.

Keywords: Earnings quality; Investment efficiency; Institutional ownership; US; UK; Germany; Japan (search for similar items in EconPapers)
JEL-codes: M40 M41 M48 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s11156-021-01024-w

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