How is Investment Efficiency Related to Investment Transparency?

Abstract

The relationship between investment efficiency and investment transparency is investigated using a sample of Australian listed company capital expenditure announcements between 2008 and 2014. We suggest two opposing hypotheses to explain why investment efficiency may influence the informativeness of investment disclosures, and present evidence that investment transparency is greater for firms that are over-investing and when sales growth is positive. This evidence is supported by the results from a simultaneous equation regression that considers endogeneity issues. Further evidence reveals that these firms achieve higher profitability and cash flow from operations surrounding the investment announcements, and that high sales growth firms maintain higher debt levels to sustain their investment. Hence the availability of liquid resources appears to support the aggressive investment practices of these firms, and their need for debt financing gives their managers incentives to disclose more financial information in order to ‘hype’ the stock and reduce the costs of financing. Considering possible reverse causality, the results show that investment transparency does not improve investment efficiency. Our interpretation is that managers’ forecasts of project profitability are unsubstantiated and hence in an over-investment situation are ineffective in reducing information asymmetries.

Keywords: investment transparency, investment efficiency, information disclosure, capital expenditures

JEL Classification: D80, D82, G30, G31