A Study On Earnings Quality And Corporate Investment Behavior

Investment behavior is the starting point of enterprises, and also the leverage of enterprises'existence and development. Research on corporate investment is mainly to explain which factors influence the behavior of corporate investment. MM model brought forward by Modigliani and Miller (1958) has made the initiative study on the decision of enterprises'investment and financing. Hereafter, because MM model hypothesis premise is not accordance with the fact, many foreign scholars have put forward the theory about which factors influence corporate investment decision. The domestic scholars also research the influence factors of corporate investment behavior, such as the internal cash flows, shareholder structure, soft-budget, financial development and so on, but few study the relationship between financial reporting quality and corporate investment, especially about the influence of earnings quality to investment efficiency.This paper chooses public listed companies in China as research objects, and systematically analyzes whether accounting information quality influences corporate capital investment behavior. Especially, it investigates how earnings management influences investment efficiency of China's listed companies. As a result, this paper gets some important findings just as follows:Firstly, we are concerned with the influence mechanism of earnings quality on corporate investment in listed companies. We find the sensitivities of capital investments to lagged accounting signals increase as earnings quality increases. The conclusion that enterprises rely on the accounting information when investment decisions are made is the same with Chen's hypothesis (2005) and this offers a new visual angle to study investment behavior.Secondly, after referring to the methods used by Biddle and Hilary (2006), we find that with the increase of earnings quality, the relevance between the internal cash flows and the corporate investment decreases, which means that the higher accounting quality reduces the investment-cash flow sensitivity at the firm level.Thirdly, we find that abnormal investment activities are correlated with discretionary accruals, that is investment inefficiency is positively correlated with earnings management. We also find that increases in abnormal corporate investment or in discretionary accruals reduce subsequent stock returns, higher-level earnings management increases the sensitivity of stock returns to inefficient investment. All of above, the research indicate that under the current institutional environment in China, which is of relative poor law protection for investors, higher earnings quality can alleviate agency cost problem, improve corporate investment decision-making and investment efficiency. These findings not only help us to better understand and expand the existing research on corporate investment behavior, but also have important theoretical and realistic implications to improve China's listed companies'investment efficiency.This paper consists of seven chapters, and the main contents of each chapter are outlined as follows:Chapter 1 is the introduction, which briefly introduces the research background and issues, contents and framework, as well as the contributions of the paper. Chapter 2 is the literature review. Since our focus is on the relationship between corporate investment and earnings quality, this paper reviews related literature in this research field about measurement of earnings quality, corporate investment and investment efficiency, which concise analysis and discussion are also undertaken for corresponding literature, and chapter 3 tries to find theoretical evidence that accounting information can improve the investment decision-making and investment efficiency.Chapter 4 investigates the sensitivities of corporate investment and accounting signals, focuses on the use of accounting information by managers in investment decision and how accounting information quality affects these activities. Chapter 5 investigates the relationship between accounting quality and the sensitivity of investment-cash flows. Chapter 6 examines the relationship between abnormal investment behavior and earnings management. Here we find that financial reporting quality can improve investment efficiency by reducing information asymmetry and adverse selection.Chapter 7 summarizes the research findings of the paper, including the research conclusions, suggestions, limitations, and the directions of future research.