Financial Restatement Impacts on Investment Inefficiencies Considering the Role of Financial Constraints

The purpose of this research was to investigate the effects of financial restatement on various investment inefficiencies with emphasis on the role of financial constraints. In this study, Richardson (2006)'s model of investing expectations was used to measure investment inefficiencies and categorize the sample member firms into over-invested or under-invested corporates. Also, the index defined by Kaplan-Zingales (1997) was utilized to examine the financial constraints. The sample included 174 companies that were active over 6 years (2012-2017) in the Tehran Stock Exchange. The results indicated that financial restatement could reduce the over-investment, while it exacerbated the under-investment ones. On the other hand, the companies with over-investment might experience greater financing constraints after financial restatement. This relationship was not significant for under-invested companies. Finally, the argument that financial restatement could affect investment inefficiencies by indirectly affecting financing constraints was also not approved by any groups of the compaines.