Earnings quality, investment decisions, and financial constraint

Carvalho, Flávio Leonel de; Kalatzis, Aquiles Elie Guimarães

doi:10.7819/rbgn.v0i0.3067

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Articles • Rev. Bras. Gest. Neg. 20 (04) • Oct-Dec 2018 • https://doi.org/10.7819/rbgn.v0i0.3067 copy

Earnings quality, investment decisions, and financial constraint

Authorship SCIMAGO INSTITUTIONS RANKINGS

Abstract

Purpose:

The purpose of this study was to investigate the relationship between accruals quality, financial constraint, and investment decisions and if earnings quality affects investment-cash flow sensitivities.

Design/methodology/approach:

An analysis was conducted of a sample with 10,318 observations of 958 non-financial companies from seven different countries, covering 1992 to 2009. Then, the investment determinants were estimated using the Generalized Method of Moments (GMM).

Findings:

Poor accruals quality was positively associated with investment rates for firms with overinvestment and negatively related to investment rates for firms with underinvestment. Additionally, the results indicate that accruals quality affects investment-cash flow sensitivities for firms in a situation of financial constraint; that is, poor accounting information quality can exacerbate the dependence of investment on free cash flow.

Originality/value:

The results show that poor accruals quality could exacerbate the problems caused by the conflict of interest between decision-makers and shareholders or other stakeholders.

Keywords:
Earnings quality; Investment decisions; Financial constraint

Economic sector	Obs.	Percentage	Country	Obs.	Percentage
Agriculture and fishing	730	7.08%	Argentina	872	8.45%
Food and drinks	1,382	13.39%	Brazil	3,928	38.07%
Trade	992	9.61%	Chile	2,048	19.85%
Construction	524	5.08%	Colombia	281	2.72%
Electro and electronics	113	1.10%	Mexico	1,511	14.64%
Electricity	1,237	11.99%	Peru	1,480	14.34%
Non-metallic minerals	545	5.28%	Venezuela	198	1.92%
Mining	591	5.73%
Oil and gas	278	2.69%
Chemistry	891	8.64%
Siderurgy and metallurgy	1,013	9.82%
Telecommunications	659	6.39%
Textile	824	7.99%
Transportation services	297	2.88%
Vehicles and spare parts	242	2.35%
Total	10,318	100.00%		10,318	100.00%

	(I/K_t-1 )	(CF/K_t-1 )	(S/K_t-1 )	(D/K_t-1 )	(ΔS)	(Size)	(AQ)	(KZ)	(ROE)
(I/K_t-1)	1
(CF/K_t-1)	0.1697	1
(S/K_t-1)	0.1951	0.3397	1
(D/K_t-1)	0.2489	0.1576	0.5471	1
(ΔS)	0.4741	0.2688	0.1821	0.1339	1
(Size)	0.1295	0.0996	-0.1149	0.0475	0.1554	1
(AQ)	-0.0005	0.0185	0.0891	0.0768	-0.028	-0.1996	1
(KZ)	-0.0608	-0.4887	-0.2733	-0.0667	-0.0323	0.0936	0.0258	1
(ROE)	0.1234	0.5296	0.1136	-0.0014	0.2102	0.1429	-0.049	-0.243	1

	Total sample	Accruals quality		Financial constraint		Investment decision
	Total sample	High	Low	No	Yes	Efficient	Over	Under
(I/K_t-1 )
Mean	0.0950	0.0548	0.0610	0.1325	0.0654	0.0453	0.3707	-0.0641
SD	0.4105	0.2772	0.4130	0.4642	0.4161	0.2007	0.5545	0.2592
Min.	-3.6024	-1.0000	-3.6024	-1.0000	-3.6024	-1.0000	-0.9926	-3.6024
Max.	3.8974	3.8974	3.8385	3.8974	3.7744	1.8843	3.8974	2.0325
(CF/K _t-1 )
Mean	0.1915	0.1762	0.1916	0.4052	0.0351	0.1705	0.2407	0.1644
SD	0.5614	0.3943	0.6509	0.7430	0.5177	0.4005	0.6103	0.5314
Min.	-4.7683	-3.7013	-4.1763	-4.7683	-4.6471	-2.9138	-4.1763	-4.7683
Max.	4.9986	4.1877	4.5323	4.9986	4.6645	4.5629	4.9986	4.8047
(S/K _t-1 )
Mean	2.4135	1.9942	2.7824	3.1247	2.1761	2.1589	2.6992	2.3067
SD	2.8173	2.2956	3.0565	3.4638	2.6774	2.4492	2.9715	2.7879
Min.	0.0000	0.0000	0.0000	0.0000	0.0000	0.0000	0.0000	0.0000
Max.	19.9981	18.4233	19.5142	19.9981	19.7033	19.9981	19.7033	19.7345
(D/K _t-1 )
Mean	1.6659	1.4627	1.9477	1.8024	1.9680	1.4328	1.9920	1.5418
SD	1.9969	1.8992	2.1796	2.6486	1.9141	1.5544	2.1584	1.9452
Min.	0.0000	0.0000	0.0000	0.0000	0.0000	0.0111	0.0000	0.0000
Max.	19.7521	19.3803	19.7521	19.7521	19.3803	18.0537	19.0000	19.3803
(ΔS)
Mean	0.1313	0.0980	0.0867	0.1501	0.1212	0.0923	0.1337	0.1545
SD	0.4216	0.2725	0.4500	0.4675	0.4394	0.3277	0.4138	0.4335
Min.	-1.0008	-1.0000	-1.0008	-1.0000	-1.0008	-1.0000	-1.0000	-1.0008
Max.	4.0000	2.9409	4.0000	4.0000	3.9231	3.5802	3.8454	4.0000
(Size)
Mean	12.3831	12.9620	12.0529	12.1469	12.6839	12.6537	12.5695	12.5403
D P.	1.8921	1.8689	1.9365	1.7879	1.8533	1.8184	1.8379	1.7752
Min.	3.0445	6.0497	3.3673	4.8828	6.0497	7.6601	7.1229	3.3322
Max.	19.1138	18.2814	19.1138	18.1060	18.1330	18.6830	19.1138	18.5160
	Total sample	Accruals quality		Financial constraint		Investment decision
	Total sample	High	Low	No	Yes	Efficient	Over	Under
(AQ)
Mean	0.0482	0.0219	0.0821	0.0481	0.0518	0.0436	0.0483	0.0495
D P.	0.0317	0.0059	0.0324	0.0308	0.0343	0.0273	0.0303	0.0314
Min.	0.0025	0.0025	0.0523	0.0051	0.0049	0.0049	0.0049	0.0025
Max.	0.4193	0.0310	0.4193	0.3127	0.3319	0.1964	0.2458	0.2654
(KZ)
Mean	1.2652	1.2962	1.2831	-0.1312	2.4604	1.3348	1.2749	1.3796
D P.	1.4684	1.0830	1.8354	1.6203	0.7323	1.2797	1.4260	1.4056
Min.	-9.9851	-7.2980	-9.9851	-9.9851	1.7982	-9.3228	-9.9851	-9.4615
Max.	9.9615	7.5727	8.7274	0.9967	9.9615	7.1859	9.7858	9.9615
(ROE)
Mean	0.0456	0.0762	0.0290	0.1075	-0.0526	0.0519	0.0624	0.0322
D P.	0.2704	0.1739	0.3727	0.1523	0.3946	0.2603	0.2553	0.2982
Min.	-1.9946	-1.6740	-1.9946	-1.4213	-1.9946	-1.9131	-1.9457	-1.9946
Max.	1.9802	1.6977	1.9802	1.4362	1.9802	1.7730	1.7755	1.9802

	Accruals quality				Financial constraint	Investment decisions
	High	Low	Yes	No	Efficient	Over	Under
(I/K_t-1)_i,t-1	-0.2088^***	-0.1345^***	-0.154^***	-0.4265^***	-0.2702^***	-0.4276^***	-0.333^***
(I/K_t-1)_i,t-1	(0.0006)	(0.0004)	(0.0007)	(0.0008)	(0.0009)	(0.0011)	(0.0007)
[(I/K_t-1)²]_i,t-1	-0.0324^***	-0.0262^***	-0.036^***	-0.0191^***	-0.0205^***	-0.0479^***	-0.0189^***
[(I/K_t-1)²]_i,t-1	(0.0004)	(0.0001)	(0.0002)	(0.0002)	(0.0001)	(0.0010)	(0.0003)
(AQ)_i,t-1			0.4358^***	-0.221^***	1.4223^***	1.4485^***	-0.6258^***
(AQ)_i,t-1			(0.0107)	(0.0184)	(0.0311)	(0.0351)	(0.0134)
(CF/K_t-1)_i,t	-0.5625^***	-0.6085^***	-0.6284^***	0.0707^***	-1.2429^***	-1.2853^***	-0.2775^***
(CF/K_t-1)_i,t	(0.0156)	(0.0059)	(0.0066)	(0.0035)	(0.0196)	(0.0095)	(0.0106)
(bKZ)_i,t	-0.0972^***	-0.0104^***			-0.1855^***	-0.0506^***	-0.0032^**
(bKZ)_i,t	(0.0037)	(0.0008)			(0.0013)	(0.0009)	(0.0016)
(S/K_t-1)_i,t	0.0435^***	0.0553^***	0.0561^***	0.0187^***	0.0727^***	0.0218^***	-0.0134^***
(S/K_t-1)_i,t	(0.0004)	(0.0001)	(0.0001)	(0.0001)	(0.0002)	(0.0003)	(0.0002)
(D/K_t-1)_i,t	0.1504^***	0.1721^***	0.1667^***	0.0673^***	0.1371^***	0.0997^***	0.1517^***
(D/K_t-1)_i,t	(0.0007)	(0.0005)	(0.0004)	(0.0001)	(0.0005)	(0.0009)	(0.0004)
(Size)_i,t	0.2268^***	0.203^***	0.2332^***	0.4512^***	0.0778^***	0.8986^***	0.2684^***
(Size)_i,t	(0.0022)	(0.0008)	(0.0011)	(0.0010)	(0.0030)	(0.0017)	(0.0012)
(ΔS)_i,t	0.1776^***	0.1171^***	0.1281^***	0.2581^***	0.2028^***	0.1061^***	0.1706^***
(ΔS)_i,t	(0.0014)	(0.0005)	(0.0006)	(0.0007)	(0.0011)	(0.0016)	(0.0009)
(ΔS)_i,t-1	-0.0076^***	-0.0112^***	-0.0335^***	0.1391^***	0.0489^***	0.0887^***	0.0682^***
(ΔS)_i,t-1	(0.0014)	(0.0003)	(0.0004)	(0.0007)	(0.0009)	(0.0012)	(0.0006)
((CF/K_t-1)^*(AQ))_i,t			0.1997^***	-0.1822^***	-1.9096^***	-0.2437^***	0.3737^***
((CF/K_t-1)^*(AQ))_i,t			(0.0192)	(0.0132)	(0.0502)	(0.0412)	(0.0227)
((CF/K_t-1)^*(KZ))_i,t	0.0677^***	0.0086^***			-0.0039^***	0.0009^*	0.0452^***
((CF/K_t-1)^*(KZ))_i,t	(0.0003)	(0.0001)			(0.0003)	(0.0005)	(0.0002)
((CF/K_t-1)^*(ROE))_i,t	0.1493^***	0.0469^***	-0.1036^***	-0.0136^***	-0.1728^***	0.007	-0.0113^***
((CF/K_t-1)^*(ROE))_i,t	(0.0091)	(0.0007)	(0.0009)	(0.0011)	(0.0031)	(0.0061)	(0.0014)
((CF/K_t-1)^*(Size))_i,t	0.0586^***	0.0381^***	0.0453^***	-0.0153^***	0.112^***	0.0996^***	0.0105^***
((CF/K_t-1)^*(Size))_i,t	(0.0014)	(0.0005)	(0.0005)	(0.0003)	(0.0015)	(0.0006)	(0.0008)
Observations	662	607	983	929	432	379	524
Sample	278	268	330	301	251	238	282
Autocorrelation test
First-order	0.0775	0.0557	0.0039	0.0785	0.0773	0.1171	0.0715
Second-order	0.2059	0.2113	0.6735	0.682	0.8541	0.5351	0.5875
Sargan test	0.9999	0.9999	0.9999	0.9999	0.9999	0.9999	0.9999

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[1] 1
. Flávio Leonel de Carvalho, Doctor of Science, University of São Paulo, São Paulo, Brazil. E-mail: flavio@ufscar.br

Contribution	Flávio Leonel de Carvalho	Aquiles Elie Guimarães Kalatzis
1. Definition of research problem	√	√
2. Development of hypotheses or research questions (empirical studies)	√	√
3. Development of theoretical propositions (theoretical work)	√	√
4. Theoretical foundation/ Literature review	√
5. Definition of methodological procedures	√	√
6. Data collection	√
7. Statistical analysis	√	√
8. Analysis and interpretation of data	√	√
9. Critical revision of the manuscript	√	√
10. Manuscript writing	√