Improving investment efficiency through financial reporting quality in emerging markets Open Access

It is commonly known that the primary objective and responsibility of financial management is to increase the value of the firm and the wealth of shareholders. Among several methods of firm valuation, free cash flows expected in the future play a role as the base to find firm value, and under the famous method of discounted cash flows, it is presumed that future cash flows go to infinity beyond a foreseeable future. The going concern assumption of accounting states that the firm has an unlimited life and will continue generating free cash flows. The ability of the firm to generate future cash flows depends on the investments because the property, plant and equipment constituting the productive capacity are assets with limited life and they need to be renewed; therefore, investments are crucially important for the growth of firms in the long term (Lang et al., 1996). Even though the primary determinant of a firm’s investment is the investment opportunities faced by the firm (Tobin, 1969), several factors affect investment decisions and cause deviations from the optimal level of investment. Since the early studies by Myer and Majluf (1984) and Jensen (1986), several papers have documented that market frictions might cause sub-optimal investment cases (Balakrishnan et al., 2014; Lambert et al., 2007; Chen et al., 2016). Information asymmetry between insiders and outsiders, agency problems in corporate governance mechanisms, moral hazard and adverse selection are among the primary causes. To achieve the wealth maximization objective, the firms are supposed to invest in projects with positive net present value (NPV). Potentially, there might be two forms of cases; the firm may have some positive NPV projects but does not undertake them, or the firm invests its funds in negative NPV projects; the former is called under-investment and the latter is called over-investment (Hubbard, 1998; Verdi, 2006). Avoiding under- or over-investment and achieving optimal levels of investment is known as investment efficiency in the literature (Jensen and Meckling, 1976; Biddle et al., 2009). The flow of high-quality information between the firms and the providers of capital is crucially important in well-functioning capital markets (Bradshaw et al., 2017) and helps improve the efficiency of investments. Among several sources of information, corporate financial reporting occupies an important position. High-quality financial reporting plays a critical role in this context by providing timely, accurate and useful information to both managers and external parties. By reducing information asymmetry and improving the transparency of firms’ economic activities, financial reporting quality (FRQ) enhances the ability of capital providers and managers to evaluate investment opportunities more accurately. As a result, firms with higher FRQ are better positioned to allocate resources toward projects with positive NPV while avoiding value-destroying investments, thereby directly improving investment efficiency and reducing both under- and over-investment problems. Prior studies documented that enhanced FRQ helps reduce information asymmetries (Healy and Palepu, 2001; Ball and Shivakumar, 2005; Delgado-Domonkos and Zeng, 2023).

Considering the importance of FRQ for the users of financial statements, the article bridges gaps in the existing literature and provides a more nuanced understanding of how transparent and reliable financial reporting can serve as a governance tool to control both under- and over-investment. While prior research has discovered the theoretical channels through which FRQ can influence investment efficiency, primarily by reducing information asymmetry and agency conflicts, empirical evidence remains fragmented and context-dependent. This study advances the literature by offering comprehensive and updated empirical analysis using a large, multi-year panel dataset that captures firm-level variation in both reporting quality and investment outcomes.

Building on the idea that poor financial reporting intensifies information asymmetry between managers and external investors, increasing the risk of both overinvestment due to managerial empire-building and underinvestment due to financing constraints, this article provides new empirical evidence supporting the notion that high-quality financial reporting can act as a corporate governance mechanism. By improving the credibility and transparency of financial information, firms are better able to mitigate agency problems and align investment decisions with shareholder interests. Unlike prior studies that often rely on aggregate or country-level analyses, this article uses firm-level data and refined measures of accrual quality to provide a more precise estimation of reporting quality.

In this article, we aim to present novel evidence on the relationship between FRQ and the investment efficiency of firms by using the data of non-financial firms from emerging countries. We hypothesize that higher FRQ improves investment efficiency by reducing information asymmetry and enabling managers and investors to allocate resources more optimally, thereby mitigating under- and overinvestment problems. To test this hypothesis, we analyze a comprehensive panel dataset of 6,468 firms from 14 emerging countries over a period from 2007 to 2021, employing pooled ordinary least square|ordinary least squares (OLS), fixed-effects panel regressions and generalized method of moments (GMM) estimations to ensure the robustness of the results. The dataset covers a relatively long period from 2007 to 2021, so that it may portray the impact of improvements in FRQ over this long period on the investment efficiency for a large, multi-country sample. Our article contributes to the literature in several ways. First, it presents new empirical evidence on the topic. Secondly, since the majority of the previous studies focus on a single country or developed countries, it is the genuine contribution that the sample used covers a large number of developing countries. In developing countries, asymmetric information and agency problems, accompanied by low investor protection are more severe compared to developed countries. Third, we used multiple analysis techniques including pooled OLS and panel regressions, as well as GMM which investigates the interplay between FRQ and firm-level investment efficiency by considering the dynamic nature of the relationship. The empirical findings consistently show a positive and statistically significant relationship between FRQ and investment efficiency, supporting the notion that higher-quality financial reporting facilitates more efficient investment decisions.

The rest of the article is organized as follows. The next part presents a review of related literature. The third part provides the details about sample, data and the methodology used. The fourth part presents descriptive statistics and the results of the regressions. The last part concludes.

Information asymmetries between corporate managers (insiders) and the providers of capital (outsiders), which are caused by market uncertainties and imperfections, may raise adverse selection and moral hazard problems, which ultimately result in under- or over-investment cases (Jensen and Meckling, 1976; Myers and Majluf, 1984). The factors that might potentially decrease information asymmetries can help avoid those agency problems and promote investment efficiency. FRQ is one of the factors that can reduce asymmetric information. Previous studies reported the existence of an association between FRQ and information asymmetries (Balakrishnan et al., 2014), and better financial reporting is associated with increased investment efficiency (Biddle et al., 2009; Chen et al., 2011; Xu et al., 2012; Assad et al., 2023).

FRQ is defined by Biddle et al. (2009) as “the precision with which financial reporting conveys information about the firm’s operations, in particular its expected cash flows, that inform equity investors”. This definition is consistent with both the International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP). According to the conceptual framework of IFRS, the objective of financial statements is to provide information about the firm’s financial position and financial performance to enable the users to make informed decisions and judgments about the prospects of the firm and also to assess the management’s stewardship. The present and the potential shareholders and investors use the information disclosed in the financial statements and the accompanying notes, and they make decisions of buying, holding or selling the securities; this process promotes the efficient allocation of funds and resources. IFRS conceptual framework presents two fundamental qualitative characteristics – relevance and faithful representation and four enhancing characteristics comparability, verifiability, timeliness and understandability. All of these characteristics imply that the quality of financial reporting is expected to benefit the users by meeting their information needs as well as by protecting them, as proposed by Jonas and Blanchet (2000) who evaluated different approaches to FRQ in the context of US GAAP and Securities and Exchange Commission (SEC) regulations and concluded that it can be evaluated under two categories as the needs of financial statements users and the protection of shareholders/investors.

Several theoretical frameworks stated the importance of investments and achieving investment efficiency for firms. First, agency theory proposed that separation of ownership and control results in some agency costs and misalignment of interests between the shareholders and the managers and also information asymmetry problems intensify the conflicts. High-quality financial reporting mitigates information asymmetry between managers and shareholders, reducing both moral hazard and adverse selection, which facilitates more informed capital allocation and restrains over- and under-investment behavior (Chen et al., 2011). As another important theory, signaling theory claims that managers may employ robust financial disclosures as signals of firm soundness. Superior FRQ helps distinguish high-performing firms from lower-quality counterparts, assisting investor decision-making and capital market functioning (Khan et al., 2024). Moreover, stakeholder theory also posits that a firm must provide relevant and reliable information to all stakeholders; therefore, high-quality financial reporting and disclosure are based on the requirements of stakeholder theory and it helps minimize information asymmetry between the firm and its stakeholders (Peasnell et al., 1998).

Prior literature on financial reporting and the level of corporate disclosures mostly focused on the benefits which are related to the financial markets, such as stock prices and stock liquidity, cost of debt, cost of equity and the coverage by the analysts, among others (Choi et al., 2005; Beaulieua et al., 2012; Dang et al., 2020). Better financial reporting enables managers to decide on feasible or unfeasible investment projects (McNichols and Stubben, 2008) and it also enables outsiders to monitor the management (Lambert, 2001). It also decreases information asymmetry (Gassen and Selhorn, 2006) and cost of capital (Hail and Leuz, 2006). Financial reporting alleviates information asymmetry between the insiders and the outsiders and helps prevent overinvestment problem in which the managers tend to expand business operations to increase their personal benefits and job security (Jensen, 1986; Holmstrom, 1999). High-quality financial reporting may potentially enhance investment efficiency in different ways such as more accurate firm valuations which result in better resource allocations and increased monitoring of the decisions and the actions of the managers in charge and the controlling shareholders (Biddle et al., 2009; Wu et al., 2023).

FRQ is mostly used as a meaning referring to the content quality and the usefulness of the financial information disclosed. Some studies examined a similar phenomenon by using a different concept, which is increased disclosure. It assumes that as the firm discloses more financial information, the quality of financial information increases. There is a need to make a distinction between recognition and disclosure, and it is commonly accepted that recognized amounts are perceived as more reliable compared to the disclosed amounts and also managers and auditors place less importance on the disclosed information (Dou et al., 2019). However, a higher amount of financial information, either on the face of financial statements or in the notes, is beneficial for the users. The increased level of disclosures enables the providers of capital to make more informed judgments about the return on investments and hence improves the capital allocation processes. If the providers of capital have access to more information to evaluate alternative investment opportunities, they can increase the amount of capital to the firms with positive NPV projects by decreasing the cost of capital for those firms and vice versa (Lai et al., 2014).

In the context of FRQ, some prior studies examined the impact of adopting IFRS on investment efficiency, because the adoption of IFRS is assumed to decrease information asymmetry by enhancing transparency, comparability and other qualitative characteristics (DeFond et al., 2011; Li, 2010; Gao and Sidhu, 2018), and it mitigates opportunistic behavior of managers and enables the providers of capital to make better capital allocation decisions, ultimately resulting in improved investment efficiency, which is supported by the empirical findings that there exists a positive association between IFRS adoption and investment efficiency (Biddle et al., 2016; Alruwaili et al., 2023).

A strand of prior literature documented that higher FRQ is associated with better investment efficiency. Assad et al. (2023) examined the FRQ–investment efficiency relationship by using the data of US companies and reported a strong positive relationship and concluded that enhancing FRQ is a key way for firms to achieve better investment efficiency. Linhares et al. (2018) examined the topic by using the data of Brazilian firms for a period from 1996 to 2012 and concluded that the firms with a higher level of earnings management are more likely to deviate from the optimal level of investment. Houcine (2017) examined the impact of FRQ on investment efficiency by using the data of Tunisian firms for the period 1997–2013 and reported that reliability and smoothness increase investment efficiency, while conservatism and relevance do not have a significant effect on firm investment decisions. Huang et al. (2023) conducted a study to explore the role of strategic alliances in the relationship between FRQ and investment efficiency for a sample of US firms and found that accounting quality helps reduce under- and over-investment problems.

Recent prior studies reported mixed conclusions about the relationship between FRQ and investment efficiency. While some of them showed a negative relationship, some others produced a positive relationship, demonstrating tendencies toward underinvestment or overinvestment, respectively (Ellili, 2022; Tahat et al., 2022). Employing the data of Indonesian firms for 2013–2015 period, Harymawan (2021) reported that higher FRQ is significantly related to improved investment efficiency, especially by limiting overinvestment, which demonstrates a positive influence. Similarly, Shahzad et al. (2019) reported that higher FRQ is associated with higher investment efficiency in the context of Pakistan. A recent study by Khan et al. (2024) confirms the positive impact of FRQ on investment efficiency in emerging and frontier markets by using large dataset covering 24 countries.

Despite the relative progress in understanding the impact of FRQ on firms’ investment behavior, the existing literature reports mixed and inconclusive findings. While several studies document that higher FRQ enhances investment efficiency by reducing information asymmetry and mitigating agency problems, others suggest that this relationship may vary across institutional contexts. These inconsistencies are particularly pronounced when comparing evidence from developed and emerging markets, where differences in legal enforcement, financial market development and information transparency may condition the effectiveness of financial reporting. Motivated by these mixed findings and the limited multi-country evidence from emerging economies, this study empirically examines whether FRQ improves investment efficiency in emerging markets. Accordingly, we propose the following hypothesis:

The sample consists of 6,468 firms from 14 emerging countries. These 14 countries are determined by initially taking Brazil, Russia, India, China, South Africa (BRICS) countries and extending them by including other emerging countries according to the classifications by international organizations such as the World Bank and International Monetary Fund (IMF). However, we removed some countries due to data unavailability. The study period covers 2007 to 2021. For the calculation of investment efficiency and FRQ proxies, we needed to use lags of one or two years; therefore, 2007 and 2008 were lost in the final dataset. The following table shows the firm-year observations in country and industry details, making 84,084 observations based on 6,468 firms. The sample includes non-financial firms whose industry details are provided in Table 1 and excludes financial firms such as banks and insurance companies due to their different characteristics and financial statements. The financial statements of the firms in the sample are compliant to IFRS.

This section explains the measurements of the variables, summarized in Table 2. The dependent variable is the investment efficiency, which is calculated as the absolute residual of the investment model (Biddle et al., 2009) multiplied by −1. The residuals are the deviation from the optimal investment level which is calculated by running cross-sectional regressions of the prior year’s sales growth (SG) over the total investment for each industry. The error term of those regressions corresponds to the deviation from the estimated level of investment. The higher value means higher investment efficiency.

Investment (INV) is the net of tangible and intangible asset acquisitions and the proceeds from the sales of those assets. SG is the change in sales in the prior year compared to the year before.

The independent variable is FRQ and calculated according to Kasznik’s (1999) accrual-based earnings management model. The absolute residuals of the accruals model are multiplied by −1, with higher values representing higher FRQ. The model is given in the following equation;

TA is total accruals, ΔSales is the change in sales from year t−1 to year t, PPE is property, plant and equipment, ΔCFO is cash flow from operations from year t−1 to year t, all scaled by total assets; ε_i,t is the error term.

This section presents the model and the details of the estimation method to test the model. The model developed to investigate the impact of FRQ on firm-level investment efficiency is shown in the following equation:

We ran three groups of regressions, namely pooled OLS, panel regressions with fixed and random effects models and dynamic panel regressions, and reported results for the whole sample, at country and industry levels. To adjust for potential heteroscedasticity and serial-correlation problems, we used adjusted standard errors.

Table 3 presents the mean, standard deviation, minimum and maximum values for all variables in three categories overall, between and within because the dataset is a balanced panel. The mean investment efficiency value for the whole sample is −4.948, with a minimum of −632 and a maximum of 0. The values are negative because the investment efficiency variable is calculated as the absolute values of residuals from investment regression and multiplied by −1. FRQ has a mean value of −0.084, ranging from 0 to −5.927, similar to investment efficiency; the absolute values of the residuals from accrual regression are multiplied by −1. The mean value of leverage is 24.2%, which is a reasonable value for non-financial firms. The mean age of the firms in the sample is 34 years. The mean value of tangibility is 30%, ranging from 0 to 99%, which indicates that some companies do not have any tangible fixed assets while some others are highly tangible intensive; this may change from one industry to another. The mean value of financial slack is 14.5%, which shows a moderate level of liquidity position for the sample firms. The mean ROA, the profitability indicator, is 3.2%, which is normal level for non-financial sector companies. The descriptive statistics show that the variables are normally distributed with reasonable standard deviations and there are no extreme outlier values.

Table 4 presents the pairwise correlations among all variables and variance inflation factors (VIF) for them. It shows that there are no high correlations among the independent variables and confirms that the model does not suffer from multicollinearity problems and this is also confirmed by VIF values, which are less than 10 for all the independent variables. In addition, it shows that there is a positively significant correlation between investment efficiency and FRQ and implies that FRQ may help improve investment efficiency.

Table 5 reports the results of pooled OLS regressions for the whole sample and at the country level. All OLS regressions including whole sample, industry and country breakdowns produced significant overall model statistics. The results revealed that FRQ has a positively significant and strong impact on investment efficiency for the whole sample and this is confirmed by the results at the country level for the majority of the countries, with the exception of Nigeria and Philippines, which have insignificant results and Pakistan, having a significant result at 10% level. The significant results in those countries might be driven by the relative low number of observations compared to other countries. The results imply that FRQ helps firms achieve an efficient level of investment and avoid over- or under-investment problems, therefore stipulating efficient allocation of funds. Firm size was found to have a positively significant effect on the relationship between FRQ and investment efficiency for the whole sample and in most of the countries, even though there are some insignificant or opposing coefficients in other countries. This implies that the relationship is more prominent for larger firms compared to smaller firms. Leverage has a negatively significant effect on the whole sample and in most of the countries. Leverage is considered a mechanism that may monitor the opportunistic behavior of managers and is supposed to improve investment efficiency, but on the other hand, it increases the financial risk of the firms. Our results show that it has a negative effect on investment efficiency. Firm age has a positively significant effect, implying that older firms are closer to the optimal level of investment as they are relatively at a more mature level of their life cycle. Tangibility has a negatively significant effect on the whole sample and in all countries, it implies that less tangible capital-intensive firms have higher investment efficiency. Financial slack has a negatively significant effect for the whole sample and in some countries but is insignificant in some other countries; as the proportion of liquid assets to total assets increases, investment efficiency decreases implying that the firm invests the liquid sources in feasible projects. Profitability has also a negatively significant effect on the whole sample and in most of the countries. Table 6 reports the results of pooled OLS regressions at the industry level, and the results of the variables are parallel to those of the whole sample. At the country level, there are no significant differences among several industries. There are strongly significant coefficients in all industries at a 1% level, except the technology industry which is at a 5% level.

Table 7 reports the panel regression results. Under panel data analysis, we have run a regression with fixed effects and random effects models. To choose between those models, we used the Hausman (1978) specification test. The test result showed that the fixed effects model is more appropriate, and we have reported the results of only the fixed effects model. Due to the characteristics of this model, the firm age variable is regarded as a dummy variable and it is omitted; therefore in Tables 7 and 8, the firm age variable is not reported. All panel regressions including whole sample, industry and country breakdowns produced significant overall model statistics. The exceptions are Nigeria and Philippines with insignificant coefficients, and Pakistan and South Africa, whose coefficients are significant at 5% level. This finding implies that improved disclosures by the firms help enhance the efficiency of the investments and avoid over- and under-investment problems. Table 8 reports the results of panel regression in industry detail and confirms the significantly positive impact of FRQ on investment efficiency; all industries have coefficients that are significant at the 1% level. Firm size has a positively significant effect for the whole sample, but the results in country detail are not conclusive. The coefficients are positive in some countries, while negative in others, and even insignificant in some others. Considering together with the results of industry details, which are positively significant in most of them, it can be concluded that firm size is a more relevant determinant within an industry. The results show that leverage produced a similar coefficient with pooled OLS regression; there is a negatively significant impact in most of the country and industry settings. This is a finding contrary to the agency theory because the use of external financing sources is regarded as a control mechanism and is expected to influence investment decisions positively; however, our results revealed a negative impact. This might be attributed to the increased financial risk and the potential for financial distress at very high levels of leverage. Tangibility, financial slack and profitability have negatively significant effects on the investment efficiency for the whole sample, as well as country and industry level, with some exceptions.

As a robustness check, we run the model according to the GMM regression. We used GMM estimator to address potential endogeneity concerns which may bias the estimated relationship between FRQ and investment efficiency. Endogeneity may arise due to reverse causality, where firms with higher investment efficiency are also more likely to invest in better financial reporting, or it may arise from omitted variable bias and measurement error. GMM is principally well-suited for panel datasets, because it allows for the use of internal instruments, for instance lagged values of the independent variables, to control for unobserved firm-specific effects and dynamic relationships. Using GMM estimators ensures robust inference while mitigating the risk of biased and inconsistent parameter estimates. Furthermore, the validity of the instruments is assessed using the Hansen test, and the absence of second-order autocorrelation is confirmed through the Arellano–Bond tests (AR1 and AR2), which reinforce the reliability of the results.

Table 9 reports the results of GMM regression for the whole sample and in country details. The results show that there is a positively significant effect of a one-year lag of investment efficiency on the current year’s investment efficiency for the whole sample and in the majority of the countries, only except Egypt, in which there is a negative coefficient.

Table 10 reports GMM results in industry details; the finding in country detail is confirmed also in industry detail except for the utilities (UT) industry. The coefficients of the control variables in GMM regression are also parallel to those in panel regression; however, firm size is found to be negatively significant, which is the opposite of the finding in OLS and panel regression. All regressions run under GMM methodology have overall model significance which is characterized by Wald tests. Those models included lagged values of dependent variable and control variables as the instruments and the total number of instruments is reported as 161. The results of Hansen tests confirmed the validity of the instruments, which are not reported in the tables. Similarly, AR1 tests for all regressions produced significant results, while AR2 tests produced insignificant results, which confirmed the absence of second-order autocorrelation.

Overall, the positive association between FRQ and investment efficiency is confirmed by three methodologies adopted, namely OLS, panel and GMM regressions. Our findings are consistent with those of prior studies, including Khan et al. (2024), Harymawan (2021), Shahzad et al. (2019), Chen et al. (2011) and Verdi (2006), among others.

The empirical results provide strong evidence that higher FRQ is associated with greater investment efficiency across emerging market firms. This relationship can be explained through several mechanisms. Firstly, high-quality financial reporting reduces information asymmetry between managers and external capital providers by improving the accuracy and transparency. When investors and creditors have access to more reliable accounting information, they are better able to assess firms’ growth opportunities and risk profiles, which lowers financing frictions and facilitates access to capital for value-enhancing projects. As a result, firms with higher FRQ are less likely to underinvest due to financing constraints. Secondly, improved FRQ mitigates agency problems by enhancing monitoring and disciplining managerial behavior. High-quality financial reports constrain managers’ ability to engage in opportunistic behavior, such as value-destroying overinvestment, by making inefficient investment decisions more observable to shareholders and other stakeholders. This monitoring role of FRQ is particularly important in emerging markets, where legal enforcement and investor protection mechanisms are often weaker.

Our findings also provide new insights beyond prior studies in several important respects. While existing research, largely focused on developed economies or a single country, documents a positive association between FRQ and investment efficiency, our study demonstrates that this relationship holds consistently across a broad sample of emerging markets characterized by higher institutional uncertainty and market frictions.

Moreover, unlike prior studies that rely on relatively small or country-specific samples, our large, multi-country dataset allows us to generalize the FRQ–investment efficiency relationship across heterogeneous emerging economies. This highlights the importance of FRQ as a fundamental mechanism for improving capital allocation efficiency in contexts where external governance mechanisms and information infrastructures are less developed. Consequently, our findings suggest that improving FRQ can play a key role in enhancing firms’ economic outcomes and supporting sustainable investment behavior in emerging markets.

This study aimed to investigate the impact of FRQ on firm-level investment efficiency and used a relatively large sample of 6,468 firms from 14 emerging countries for a period from 2007 to 2021, resulting in a balanced panel of 8,408 firm-year observations. For both the dependent variable, investment efficiency and the independent variable, FRQ, we ran cross-sectional regression for each industry, on a yearly basis and obtained residuals. The absolute values of the residuals are multiplied by −1, and those calculated values are used as the proxies in the main model. As the estimation method, we run pooled OLS regressions and panel regressions with fixed effects and random effects models, and the results of the regressions are reported for the whole sample as well as in industry and country details. As a robustness check and also to examine the dynamic nature of the relationship, we used the GMM regressions and reported the same pattern as other regressions. The results of static regressions, namely OLS and panel, show that there is a strong and positively significant impact of FRQ on the investment efficiency of firms for the whole sample and in the majority of country and industry settings. The control variables used in the regressions mostly produced significant results, even though there are exceptions in some countries and/or industries. The results implied that better financial reporting and disclosure help improve the firm-level investment efficiency, encouraging managers to achieve optimal levels of investment, thereby avoiding under- and over-investment problems. Our results and findings are consistent with those of prior studies such as Li and Wang (2010), Chen et al. (2011) and Houcine (2017), among others.

The results and the findings of this study will have important implications for corporate managers, policymakers, as well as for all the users of the financial statements. Improved FRQ and enhanced disclosures by the firms will have a positive impact on the efficiency of the investments, mitigate the information asymmetries, and as a result, in the long run, the firm value will be affected positively.

Having provided empirical evidence of a positive association between FRQ and investment efficiency, the results of the article reinforce the notion that high-quality financial disclosures play a serious role in mitigating information asymmetry and agency conflicts. Firms producing more reliable and timely financial information display improved capital allocation, observed by reductions in both over-investment in low-return projects and under-investment in high-return projects. Precisely, the results support continuing efforts to strengthen financial reporting frameworks and enforce compliance with improved accounting standards such as IFRS or US GAAP, as well as the harmonization between them. Enhancing the credibility and comparability of financial reports and supplementary information can serve as an effective tool to foster investment efficiency, mainly in markets with weaker governance structures or limited investor protection. Additionally, the findings underscore the value of transparency as a market discipline mechanism and suggest that policy initiatives aimed at improving disclosure quality can yield concrete economic benefits by promoting more efficient capital markets. The results also imply that financial reporting is not only a compliance for the firms, but it functions as a mechanism for good corporate governance and improved economic efficiency.

As a practical implication for policymakers, the results emphasize the importance of development and implementation of comprehensive and principle-based accounting frameworks that enhance the relevance, reliability and timeliness of financial information. Regarding the regulators, the results of our study imply that those bodies must ensure that firms not only adopt but effectively implement good financial reporting practices reflecting the fundamental economic reality of the operations.

Although we have collected data from a large sample of major emerging countries and for a relatively long period, the study has some limitations. Future studies may consider expanding the sample by including more countries, which would produce more comprehensive results. We included several control variables in the model; however, future studies may also consider including additional control variables, especially those related to corporate governance mechanisms which might potentially affect both financial reporting practices as well as the decision-making processes about the investments. As another limitation, the sample period ends in 2021 due to data availability constraints related to the construction of consistent FRQ measures across emerging markets. Although this period captures a substantial phase of reporting quality improvements and capital market development, subsequent regulatory changes and advancements in reporting practices may affect the relationship between FRQ and investment efficiency. Future research could extend the analysis by using more recent and comparable data.