An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Kevin Sun
University of Hawaii at Manoa

Abstract: Previous literature points out that outside shareholders reduce information asymmetry by requiring extensive financial reporting, while insiders, such as banks, more frequently use private communication channels. I hypothesize that high quality financial reporting improves capital allocation decisions, but its usefulness increases (declines) with equity (bank) financing. I find that a country’s legal, political and economical infrastructure improves the country’s capital allocation efficiency. Financial reporting quality beyond the level associated with a country’s infrastructure improves capital allocation efficiency for industries more dependent on equity financing. My findings are consistent with a heterogeneous demand for financial accounting information. Adopting better financial reporting standards will be more beneficial to industries dependent on equity financing.

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