Financial Reporting Quality, CEO Age, and Investment Efficiency: Evidence from the U.S. Market

Financial Reporting Quality (FRQ) is crucial for the accurate representation of a company’s financial performance and position. Corporate documentation, such as annual reports, is used by managers to enhance their investment decisions. Better reporting could improve the investment decisions of managers, thus improving the Investment Efficiency (IE) of the company, avoiding both overinvestment and underinvestment. This study examines the impact of financial reporting quality on the firms' investment efficiency using accounting and stock data for U.S. listed firms from 2010 to 2022. The data were acquired through CRSP, Compustat and BoardEx databases. Our final sample consists of 10,350 firms yielding 70,939 firm-to-year observations. We adopted the Chen et al. (2011) approach defining FRQ and Biddle et al. (2009) for IE. Our results show that financial reporting quality is positively related to investment efficiency and that this positive effect is more pronounced in firms with aged CEOs. The study conducts robustness checks on these results by utilizing alternative empirical models. The results lend support to the theory by Biddle et al. (2009), suggesting that firms with high reporting quality are less likely to overinvest or underinvest. Moreover, this study extends the research by demonstrating that CEO age has an enhancing effect on the impact of financial reporting quality (FRQ) on investment efficiency (IE).