FINANCIAL REPORTING QUALITY AND INVESTMENT EFFICIENCY; EVIDENCE FROM INSURANCE COMPANIES IN ETHOPIA

Abstract

One of the objectives of financial reporting is to facilitate the efficient allocation of capital in the economy. One of most important aspects of this fact is to improve the investment decisions. Also, increase in the financial transparency can be considered as a useful factor to reduce investment inefficiency. Many factors influence the quality of financial reporting. Also, many factors can have an impact on financial reporting. Several studies have tried to investigate the link between the financial reporting quality and financial and non-financial variables of firms. This study intends to evaluate the association between financial reporting quality and investment efficiency in the insurance sector in Ethiopia with reference to general (non-life) insurance companies on basis of data covers six years (2011-2016) period. The study selected sample of twelve (12) insurance companies to study them for a period of six years (2011-2016) with total of 72 observations through panel data. Accordingly, the study used documentary analysis of companies’ audited financial statements of general insurers which obtained from NBE and head office of each insurance company. Financial reporting quality used as explanatory variable and control variables were selected to disclose their relationship and influence on the relationship between financial reporting quality and investment efficiency. The results of panel least square regression analysis indicate that firm size, ROA (Return on Assets) and firm growth have statistically significant effects on the relationship between financial reporting quality and investment efficiency in the insurance companies’ of Ethiopia. On the other hand firm age, cash holding, leverage and tangibility of assets has statistically insignificant effect on relationship between financial reporting quality and investment efficiency in the insurance companies’ of Ethiopia. Based on this finding, the study suggests that, it is essential to provide high-quality financial reporting to influence users in making investments decisions, and to enhance market efficiency. The higher the quality of financial reporting, the more significant are the benefits to be gained by investors and users of the financial reports.