Financial Reporting Practices and Investment Decisions: A Review of the Literature

Abstract

This study presents an effort to summarize evidence on literature about the effect of financial reporting practices on investment decisions. Regulatory interventions/changes impact financial reporting and thus play a significant role on the international comparability/usage of financial statements and as a result on investment decisions. We discuss existing literature regarding the effects of financial reporting practices firstly on the cost of equity capital. We then summarize literature concerning the effect of financial reporting practices on investment decisions as documented in the literature in the areas of earnings management; information asymmetry effects; accounting quality; the effects of the information environment; investment efficiency; over investment –under investment and cash flow sensitivity; stock market efficiency.