DEFRI SULISTIYANTO

10204611

chapter 5
Result
The Role of Financial Reporting Quality in
Mitigating the Constraining Effect of
Investments (H1)
The Mitigating Role of Financial Reporting
Quality for R&D Investments vs. Capital
Investments (H2)
The Mitigating Role of Financial Reporting
Quality as a Function of Firms Growth Option
(H3)

 The Role of Financial Reporting Quality in Mitigating the Constraining Effect of

Investments (H1)

The results for the control variables in Equation 1

are consistent with prior research (Biddle et al.
2009)
Total investments decrease in firm size, sales
volatility, bankruptcy risk, leverage, cash flow
from operations, firm age, length of operating
cycle, and incidence of losses, but increase in
investment opportunities, cash flow volatility,
investment volatility, assets tangibility, and cash
balance.

 The Mitigating Role of Financial Reporting Quality for R&D

Investments vs. Capital Investments (H2)

This finding provides support for H2,

suggesting that the role of high quality
financial reporting in mitigating the
constraining effect of dividends on investment
is more pronounced for R&D investments than
for capital investments.

 The Mitigating Role of Financial Reporting Quality as a

Function of Firms Growth Option (H3)

 These findings provide support for H3,

suggesting that financial reporting plays a
particularly important role in mitigating the
contraining effect of dividends on R&D
investments for firms with larger porting of firm
value attributable to growth options.

CHAPTER 6
Further Analysis
Does the Mitigating Role of Reporting Quality
Vary across Firms based on Whether Firms
Have Decreased or Increased Dividends?
Alternative Proxy for Reporting Quality
Alternative Approach to Alleviate the Potential
Endogeneity of Dividends.
Underinvestment of Overinvestment

 Does the Mitigating Role of Reporting Quality Vary across

Firms based on Whether Firms Have Decreased or Increased
Dividends?

 the results suggest that high quality

financial reporting plays a particularly
important role in mitigating the negative
effect of dividends on R&D investments
among firms that have decreased dividends.

 Alternative Proxy for Reporting Quality

 This result is consistent with H3.

Overall, our results are robust to using
earnings restatements as an alternative, nonaccrual- based proxy for reporting quality

 Alternative Approach to Alleviate the Potential

Endogeneity of Dividends.
Overall, the results are robust to using an
alternative approach commonly used to
alleviate potential endogeneity concerns.

 Underinvestment of Overinvestment
We find that the effect of dividends on investments is less
negative for firms with higher quality financial reporting.
We interpret this result as consistent with our
underinvestment explanation in which high quality
financial reporting mitigates the constraining effect of
dividends on investments.
However, because dividends can also play a role in
reducing overinvestments by limiting the free cash flow
available to management, an alternative overinvestment
explanation for our finding could be that higher quality
financial reporting

CHAPTER 7
Conclusion
This study provides new evidence that financial
reporting quality plays an important role in the
interaction of firm dividend policy and
investment decisions.
The high quality financial reporting has the
important and previously unidentified, benefit of
alleviating the constraining effect of firms
dividend policy on their investment decisions,
which in turn reduces the risk that firms forgo
valuable investment projects in order to maintain
dividends.

THANK YOU!