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Financial reporting quality, ownership concentration, and investment efficiency: evidence from China

Fusheng Wang, Zhibiao Zhu, John Hoffmire

This paper uses 3,726 samples of Chinese listed firms during the period 2008–2012 to examine the relation between financial reporting quality, ownership concentration, and investment efficiency. We find that financial reporting quality is negatively associated with both underinvestment and overinvestment. Further, financial reporting quality is more strongly associated with overinvestment for firms with low ownership concentration, which suggests that financial reporting quality can reduce information asymmetry between the managers and investors and thus lower shareholders’ cost of monitoring managers and improving project selection. Our findings contribute to the literature on financial reporting and investment in emerging capital markets.