Investigating the Effect of Accounting Information Quality on the Relationship between the Degree of Non-optimality of Capital Structure and Inefficiencies of Investment

Investment efficiency is one of the important and influential factors on the firm’s performance. Management financing decisions affect investment decisions due to the effects that the Non-optimal capital structure has on the cost of capital rate and cash flows of the firm. In addition, one of the important and influential factors on the financing and investment decisions is the information asymmetry between management and investors. Increasing the quality of accounting information will reduce the information asymmetry between management and investors that can affect the firm's capital structure and investments. This research investigates the effect of accounting information quality on the relationship between the degree of non-optimality of capital structure and investment inefficiencies of a firm.

This is an applied reseach and it is a quasi-emprical research and its methodology is post-event research. This research investigates the real data of firms listed on the Tehran Stock Exchange (TSE) and, because of that, its results are generalizable to the research population. In this research, we have used a systematic elimination method to choose the research sample. The research hypotheses were examined by collecting data from 147 companies listed on the Tehran Stock-exchange during 2004-2019. Accounting information quality was measured using the model of Francis et al. (2005) and investment inefficiencies were also measured using the model of Biddle et al. (2009) and the non-optimality degree of the capital structure was also measured by the model introduced by Synn and Williams (2015).

The results of testing research hypotheses show that there is a positive and significant relationship between the non-optimality of the capital structure and inefficiencies of investment. In this way, the increase in the non-optimality of the capital structure increases inefficiencies of business unit's investments. Also, the findings show that the quality of an accounting information reduces the inefficiencies of investments in the business unit by reducing the non-optimality of capital structure, that is, it actually moderates this relationship. In other words, increasing in the non-optimality of the capital structure increases the inefficiency of the investments of business units. Also, reducing profit management through discretionary accruals and increasing the quality of profit, which is a measure of increasing the quality of accounting information, will reduce information asymmetry between management and investors. Following the reduction of information asymmetry, the problems caused by the problem of reverse selection and the sensitivities and problems of financing are reduced, and as a result, the financing process is easier for the company and causes the state of the company's capital structure to be closer to the optimal point. Finally, with the improvement of the capital structure and the positive impact of reducing the non-optimality of the capital structure on the cost of capital and cash flows at the management's disposal, the decision-making process of the management in the field of company investments will tend to increase efficiency. The results of the present study are in line with the results of Bharath et al. (2009) and Gomariz and Balesta (2014).

The quality of accounting information as one of the factors that reduces information asymmetry can decrease the non-optimality of the capital structure through adjusting available cash flows and expected interest rates, which leads to a reduction in the inefficiency of the entity’s investments. The results of this research can be useful for investors, managers and the stock exchange organization. considering the effect of the non-optimal size of the capital structure on the inefficiency of the investments of business units, the managers should identify the optimal ratio of their capital structure and calculate the deviation of the company's capital structure from the optimal level and in the direction of take steps to achieve the optimal capital structure, and according to the results of this research, by achieving the optimal capital structure (reducing the non-optimality of the capital structure), they can speed up the reduction of the inefficiency of investments, which can lead to an increase in the value of the company. Actual and potential investors are suggested to pay attention to the quality of accruals and the optimal size of the capital structure of listed companies because these things can ultimately lead to an increase in the value of the company. Also, considering the fact that the analysis of the quality of accruals and the optimization of the capital structure may be difficult or impossible for a large part of investors, perhaps in this regard, the ranking of companies in terms of these cases, by the stock exchange organization, is a useful help in choosing the best company for investors.