ASBBS Proceedings of the 26th Annual Conference

THE INFLUENCE OF ACCOUNTING INFORMATION ON

INVESTMENT EFFICIENCY: EVIDENCE FROM EUROPEAN
STOCK MARKETS

O’Connell, Vincent
Abughazaleh, Naser
Gulf University for Science and Technology, Kuwait
Puurand, Elina
Amsterdam Business School

ABSTRACT

This study explores the impact of financial reporting information on capital investment
efficiency across several European countries. In accordance with our theoretical predictions,
our results show that higher quality financial reporting is associated with greater levels of
investment efficiency within our sample firms which are drawn from the UK, Netherlands and
German stock markets. However, notwithstanding the overall positive association, significant
differences in the financial reporting quality-investment efficiency relationship are apparent
across countries. The influence of IFRS adoption on this relationship is rather mixed with
some interesting cross-country differentials apparent. We find that IFRS adoption
significantly strengthens the relationship between financial reporting quality and investment
efficiency in Germany but not in the UK or the Netherlands.

1. Introduction
Much of the literature on the functioning of modern firms and markets assumes the existence
of conflicts between firms’ controlling and financing parties. Agency theory predicts that by
being directly related to the processes of organizing resources and directing activities,
managers are naturally better informed about the expected profitability and the timing of the
payoffs from investments than external capital suppliers. Consequently, one important role of
external financial reporting is to reduce the asymmetric information problem through the
provision of detailed and timely information to external information users (Aerts and Zhang,
2014; Bushman and Smith, 2001; La Rosa and Liberatore, 2014; O’Connell, 1995). In the US
context, prior research (e.g., Biddle and Hilary, 2006; Biddle et al., 2009) suggests that by
reducing information asymmetries, higher quality financial reporting may improve firms’
internal capital investment decisions. This is a crucial consideration from the perspective of
managers charged with the task of achieving the optimal level of investment efficiency.
To date, there is a dearth of empirical evidence on the effect of external reporting quality on
firms’ internal capital investment efficiency in a European setting. In addition, while
implementation of International Financial Reporting Standards (IFRS) has the potential to
increase firm-level capital investment efficiency, by mitigating extant information
asymmetries and agency problems, there is little empirical evidence on this topic. In light of
these observations, our objectives are twofold. Firstly, we examine the association between
external financial reporting quality and internal capital investment efficiency among publicly
listed firms in three European Union member states, i.e., Germany, the United Kingdom
(UK), and the Netherlands. Secondly, we explore whether the adoption of IFRS has had an
impact on firms’ internal investment efficiency.

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