Investment Efficiency and Disclosure Quality among Listed Firms in Kenya

Abstract

Purpose- The level of investment efficiency that a firm possesses may to a large extend influence its disclosure quality. The purpose of this article is to argue that the level of investment efficiency in a firm has a significant relationship with the precision and quality of financial disclosures that the firm releases.

Design/methodology/approach- Based on a data set of 702 firm year observations for the financial period 2008- 2020, the researchers investigated whether investment efficiency is associated with disclosure quality. The relationship between the independent and dependent variables was tested using multivariate fixed effect panel data regression models. In addition, the researchers included firm level characteristics as its control variables given that they are known to have an association with disclosure quality in the regression models.

Findings- The findings reveal that investment efficiency has a significant positive relationship with disclosure quality and that higher investment efficiency is associated with higher disclosure quality. The findings also revealed that majority of listed firms in Kenya were overinvesting (57%) whereas the remaining 43% were found to be underinvesting.

Research Limitations/implications- The scope of the study was on one developing country. There is need for additional studies that will focus on other jurisdictions.

Practical implications- The study recommends the inclusion of investment efficiency scorecards in both management and statutory reports for purposes of improving the quality of external stakeholders’ investment decisions. The findings further reiterate the need for firms and regulators to come up with policy frameworks on minimum criteria targeting project preparation, project approval, project budgeting and project transparency.

Originality/Value- The study emphasizes the importance of analyzing deviations from optimum investment level and the contribution of these deviations on the quality of firm disclosures.

Keywords: Investment Efficiency, Disclosure Quality, Listed Firms in Kenya