Financial Reporting Quality and Corporate Investment Efficiency: The Role of Audit Committee Independence

Abstract

This study aims to analyze the impact of financial reporting quality (FRQ) on corporate investment efficiency (IE) and investigate this relationship with the moderating effect of audit committee independence (ACI). FRQ decreases information asymmetry, reduces managerial opportunism and enhances allocation of corporate resources. The study is hypothesized that good financial reporting allows managers and outside capital suppliers to make better investment decisions. Moreover, it is also hypothesized that audit committee independence strengthens the relationship. The study covers non-financial firms listed at the Pakistan Stock Exchange (PSX) for the period from 2016 to 2025 and utilizes the information from annual reports and other secondary sources in the fields of financial reporting and corporate governance. The study uses pooled ordinary least squares, firm fixed effects, and System Generalized Method of Moments estimations to investigate the relationships and to mitigate the possible endogeneity issues. Results indicate that increased financial reporting quality is positively correlated with investment efficiency. Moreover, the audit committee independence strengthens the positive relationship between financial reporting quality and corporate investment efficiency by providing a monitoring function for management. The findings remain robust after employing alternative measures of variables and additional endogeneity tests. The study makes a contribution to the existing literature of the role of high financial reporting quality and audit committee independence in enhancing corporate investment decisions in Pakistan.

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