The Effect of Private Information and Monitoring on the Role of Accounting Quality in Investment Decisions

By Anne L. Beatty, Scott Liao, Joseph P. Weber. 2009

145 citations recorded by the source corpus.

We investigate how private information and monitoring affect the role of accounting quality in reducing the investment-cash flow sensitivity. We argue that access to private information and direct restrictions on investments are likely to affect the extent to which accounting quality reduces financing constraints. Our results suggest that for financially constrained firms, banks’ access to private information decreases the value of accounting quality. We further find that, for both financially constrained and unconstrained firms, covenants directly restricting capital expenditures also mitigate the importance of accounting quality. Our results suggest that when information asymmetry problems are likely to be the largest, accounting quality is most important. However, the importance of accounting quality is mitigated if outside capital suppliers have access to private information and is eliminated if they impose contractual restrictions on investment. We also provide evidence that banks’ access to private information reduces the cash flow sensitivity of cash and mitigates the importance of accounting quality in reducing this sensitivity. This additional evidence suggests that our investment-cash flow sensitivity results are not driven by measurement error of the investment opportunity set.

Subfields: Accounting, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/891007c31514cd95c7aee4f243d230c23cb65c16

How researchers see this paper

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In Accounting

1. Christopher S. Armstrong
2. W. Guay
3. Urska Kosi
4. Annita Florou
5. Joseph P. Weber
6. Robert M. Bushman
7. David F. Larcker
8. Regina Wittenberg-Moerman

In Strategy and Management

1. Christopher S. Armstrong
2. W. Guay
3. Joseph P. Weber
4. Annita Florou
5. Urska Kosi
6. David F. Larcker

Citations in the corpus

• The Role of Information and Financial Reporting in Corporate Governance and Debt Contracting (2010, background): “Although Bharath et al. (2008) focus on the association between security and maturity, recent papers by Chava et al. (2010) and Beatty, Liao, and Weber (2010) examine other contract features, such as investment and dividend payout restrictions, and the use of cross-acceleration provisions.”
• Accounting Conservatism and Firm Investment Efficiency (2016, unknown): “2 See, among others, Bens and Monahan (2004), Biddle and Hilary (2006), Hope and Thomas (2008), McNichols and Stubben (2008), Biddle et al. (2009), Beatty et al. (2010), and Cheng et al. (2013). underinvestment in financially constrained firms is novel, as prior research focuses only on the role of…”
• Financial Reporting Quality and Labor Investment Efficiency (2014, unknown): “For the third alternative, we follow Beatty et al. (2010) and form a composite of four”
• Does mandatory IFRS adoption facilitate debt financing? (2015, background): “have alternatives for mitigating agency costs, prior literature suggests accounting quality may ultimately be less important in financing decisions (Biddle and Hilary 2006; Beatty et al. 2010).”