Financial reporting quality and investment efficiency: the moderating role of audit quality

Abstract

This study aims to analyze the influence of financial reporting quality (FRQ) and audit quality (AQ) on firms’ investment efficiency (IE) within an emerging market context and to explore whether AQ acts as a moderating factor in the relationship between FRQ and IE. This study uses panel data from 291 non-financial listed firms in Vietnam covering the years 2014–2023, totaling 2,910 firm-year observations. IE is measured as the residual from an investment model based on growth opportunities. FRQ is created from three measures based on accruals and revenue, along with a composite FRQ index. The models are estimated using feasible generalized least squares (FGLS) and the two-step system generalized method of moments (SGMM). Both FRQ and AQ positively influence IE, with AQ demonstrating greater robustness under SGMM. The interaction between FRQ and AQ is statistically significant and negative, suggesting a partial substitution effect. FRQ measurement methods may be subject to estimation errors, and AQ is constrained to a binary Big Four audit firms proxy. Potential self-selection bias and limited generalizability remain considerations. Firms not audited by the Big Four audit firms are encouraged to strengthen their FRQ through timely and predictive disclosures. Simultaneously, regulatory authorities should enhance their oversight of audit practices and of IFRS implementation. Improving FRQ and AQ fosters transparency and efficient capital allocation. This study offers new evidence from Vietnam, demonstrating that FRQ and AQ serve as partly substitutive governance mechanisms in emerging markets.