<abstract xmlns="http://www.w3.org/1999/xhtml"><p> This study explores the firm-level relationship between earnings quality and investment efficiency. Higher quality of reported results has the capacity to positively impact the efficiency of company’s investment levels by over- and underinvestment reduction. The research is carried out on the sample of 7546 companies from Eastern Europe for the period 2010-2015. Eastern European countries have a unique institutional and business environment that is relevant to the purpose of this paper. We divide the sample into 2 fundamentally different economic sectors - industrial and retail - and test the significance of each factor in the main relationship. We also examine the factor of the firm’s ownership form by comparing earnings quality with investment efficiency values between public and private companies. Our main results show that a higher earnings quality mitigates both overinvestment and underinvestment issues. The relationship between earnings quality and underinvestment turns out to be stronger in the industrial sector. As for the comparison of public and private firms, public companies on average demonstrate a higher earnings quality and lower overinvestment issues.</p></abstract>

This study explores the firm-level relationship between earnings quality and investment efficiency. Higher quality of reported results has the capacity to positively impact the efficiency of company’s investment levels by over- and underinvestment reduction. The research is carried out on the sample of 7546 companies from Eastern Europe for the period 2010-2015. Eastern European countries have a unique institutional and business environment that is relevant to the purpose of this paper. We divide the sample into 2 fundamentally different economic sectors - industrial and retail - and test the significance of each factor in the main relationship. We also examine the factor of the firm’s ownership form by comparing earnings quality with investment efficiency values between public and private companies. Our main results show that a higher earnings quality mitigates both overinvestment and underinvestment issues. The relationship between earnings quality and underinvestment turns out to be stronger in the industrial sector. As for the comparison of public and private firms, public companies on average demonstrate a higher earnings quality and lower overinvestment issues.

Earnings Quality and Investment Efficiency: Evidence from Eastern Europe

Review of Economic Perspectives

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

{"article-title":"Earnings Quality and Investment Efficiency: Evidence from Eastern Europe"}

This study explores the firm-level relationship between earnings quality and investment efficiency. Higher quality of reported results has the capacity to...

Earnings Quality and Investment Efficiency: Evidence from Eastern Europe

Published Online: Dec 21, 2017

Page range: 441 - 468

Received: May 29, 2017

Accepted: Oct 13, 2017

DOI: https://doi.org/10.1515/revecp-2017-0023

Keywords
Earnings quality, financial reporting quality, investment efficiency, overinvestment, underinvestment

© by Victoria Cherkasova

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Earnings Quality and Investment Efficiency: Evidence from Eastern Europe

Published Online: Dec 21, 2017

Page range: 441 - 468

Received: May 29, 2017

Accepted: Oct 13, 2017

DOI: https://doi.org/10.1515/revecp-2017-0023

KeywordsEarnings quality, financial reporting quality, investment efficiency, overinvestment, underinvestment

© by Victoria Cherkasova

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Keywords
Earnings quality, financial reporting quality, investment efficiency, overinvestment, underinvestment