The Effect of Firm Value and Accounting Profits on Capital Expenditures: The Moderating Role of Internal Information Quality

Document Type : Research Paper

Authors

1 Associate Professor of Accounting, University of Isfahan, Isfahan, Iran.

2 Assistant Professor of Accounting, University of Isfahan, Isfahan, Iran.

3 M.A. of Accounting, University of Isfahan, Isfahan, Iran.

10.22103/jak.2021.17813.3522

Abstract

Objective: Deciding on the amount of capital expenditure is one of the most critical managers' decisions in companies. Information published in financial statements (mainly accounting profit) and market-based information (primarily the market value of companies) have always been considered two complementary sources of information that influence economic decisions from the perspective of users (including managers). However, the quality of companies' internal information can strengthen or weaken this influence. In other words, the quality of companies' internal environment is expected to influence both the information in financial statements, which is the product of such an environment and the market value of companies, which responds to this product. The better the accounting information quality, the more efficient investment decisions will be. In this study, the term "internal information quality" refers to the quality of the information products produced in the company's internal environment, of which accounting information is only one. According to the "internal information quality" hypothesis, this paper examines the modifying role that the company's internal information quality can play in the impact of the company's value and accounting profit on capital expenditures.
 
Method: Two variables, including non-restatement and corporate transparency, have been selected as indicators of the quality of internal information of the company. Then, four hypotheses were compiled, and a sample consisting of 181 Tehran stock exchange listed companies in the period 2011 to 2019 was created. The research hypotheses were tested using multiple regression in Eviews 12 applying the combined data method. In addition, descriptive statistics and correlation analysis were used to analyze the data before testing the hypothesis. In this study, Limer F and Hausman tests were used to determine the nature of the combined data. Brush-Godfrey and Wiggins and poi's (2003) tests were used to determine autocorrelation and heteroscedasticity, respectively. In addition, the VIF statistic was used to test for multicollinearity. We applied the GLS method to reduce heteroskedasticity and added a first-level autoregressive variable ((AR (1)) to control for autocorrelation. To ensure that the results of the research hypotheses did not depend on the measurement method for the variable "quality of internal information," these hypotheses were retested in this study using the variable "corporate transparency" as an alternative indicator to measure the quality of internal information.
Results: The results revealed that firm value and accounting profit have a positive effect on capital expenditures. This is because managers consider the market value of the company as a signal for their investment decisions, and the profitability of these decisions (capital expenditures) is reflected in the accounting profit. It was also found that the "internal information quality" hypothesis does not fit companies operating in Iran. The quality of companies' internal information does not affect the relationship between accounting profit and capital expenditure. No reliable results were found about the internal information quality effect on the relationship between firm value and capital expenditures. The results of this research show that the corporate transparency index is more consistent with the theoretical basis of this research and may be a more appropriate index to measure the quality of internal information than compared to non-restatement.
 Conclusion: Managers of companies operating in Iran in deciding on capital expenditures do not pay much attention to the internal information environment of the company and the information produced by it. This result is probably due to the fact that the quality of internal information is not reliable from the managers' point of view. The provision of this information is associated with high costs for the company. This means that the cost of producing information within the company outweighs the benefits. If managers focus their efforts on improving and enhancing the internal information environment, the information generated by this environment will become a powerful source of information for investment decisions and the benefits will outweigh the costs. Also, to measure companies' internal information quality, the corporate transparency variable is a more reliable indicator than the non-restatement of financial statements. Accounting profit is probably not the most influential product of companies' internal information environment. The results of this study can be helpful for regulatory bodies such as the Securities and Exchange Commission and validation accreditation bodies such as the auditing organization and the Society of Certified Public Accountants. Future researchers are also suggested to design and conduct research that can extract the essential products of companies' internal information environment from the managers' perspective and then use these products as a proxy for accounting profit in this research so that the results can be compared with the current study.

Keywords

References

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  • Receive Date: 30 June 2021
  • Revise Date: 18 October 2021
  • Accept Date: 26 October 2021

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