Financial Reporting Quality, Debt Maturity, and Chief Executive Officer Career Concerns on Investment Efficiency

• Main Authors: Darlin Aulia, Sylvia Veronica Siregar
• Format: Article
• Language: English
• Published: Associação Nacional de Pós-Graduação e Pesquisa em Administração (ANPAD) 2018-05-01
• Series: BAR: Brazilian Administration Review
• Subjects: investment efficiency; overinvestment; underinvestment
• Online Access: http://www.scielo.br/pdf/bar/v15n2/1807-7692-bar-15-02-e170120.pdf

The purpose of this research is to investigate the effect of financial reporting quality, debt maturity, and CEO career concerns on investment efficiency in Indonesia. This study used a sample of 680 observations from non-financial companies in Indonesia during the period from 2012 to 2015 using panel regression. The results show that financial reporting quality does not affect investment efficiency. This might be because the quality of financial reporting has no effect in the overinvestment scenario. Under this condition, financial reporting quality cannot mitigate the occurrence of overinvestment due to the high level of agency problems. However, financial reporting quality has a significantly positive effect under condition of underinvestment, which means that financial reporting quality can reduce the occurrence of underinvestment because it can be used to attract external funds so that companies can avoid underinvestment conditions. The debt maturity has a negative effect on investment efficiency. In particular, debt maturity has no effect on underinvestment, but it does have an effect on overinvestment, because by using short-term debt, the company has funds that can be used to make investments to enable overinvestment. CEO career concerns have no effect in underinvestment conditions because companies do not experience funding constraints, so the CEO career concerns do not mitigate underinvestment. Whereas in conditions of overinvestment, career concerns have a positive effect. Thus, CEO career concerns can reduce the occurrence of overinvestment.