Abstract

We investigate whether accounting information system quality has an impact on the level and efficiency of firms’ investments. While firms’ growth depends on investment and financing decisions, accounting information is fundamental for the decision-making of several stakeholders. We assess the accounting information system quality by discretionary accruals, whereas the investment inefficiency is estimated by the residuals of an investment regression for a sample of 3073 Portuguese SMEs from 27 industries, over the period from 2016 to 2021 using a panel regression analysis. The empirical evidence suggests that firms exhibiting higher accounting information system quality tend to invest more. In addition, firms with a lower accounting information system quality have more inefficient investments, as they tend to engage in more overinvestment, although this is not significant for underinvestment. Therefore, this study provides new evidence regarding the impact of accounting information systems on investment that may be useful for several stakeholders, such as managers, creditors, regulators, and academics, by providing evidence for SMEs, where empirical studies are scarce.

Introduction

Accounting information system quality is essential to accurately communicate the current and expected financial/economic position of firms. Financial statements are the main source of information for stakeholders to make decisions (Francis et al. 2004; Yuan et al. 2022). Therefore, it is essential that the information disclosed is transparent and reflects the true and fair view of the firm. Bhattacharya et al. (2013) for the United States and Cerqueira and Pereira (2015) for Europe find empirical evidence that the quality of accounting information contributes to mitigating information asymmetry which in turn means a reduction in the cost of raising funds. Therefore, prior literature has investigated factors that may lead to activities that degrade accounting information system quality, aiming at creating mechanisms to mitigate those activities, thereby improving accounting information system quality. However, Jones (1991) argues that these activities are not easy to detect.

In the context of agency theory and stakeholder theory, the decision-making of investors and creditors depends on the quality of the accounting information system, as mentioned by McNichols and Stubben (2008) and Biddle and Hilary (2006). In the case of investment, it is a fundamental factor for the sustainability and growth of firms, which implies attracting investors and/or obtaining funding from banks. Firms have assets available to develop their economic activities due to their investment ability, affecting their intrinsic value. In addition, Alkafaji et al. (2023) emphasize that investment in information technology tends to reduce the cost of producing accounting information and increases its reliability. The efficiency of a firm’s investment directly affects its survival and development and, in macroeconomic terms, the allocation of resources in society. However, investment inefficiency is usually observed in most firms, specifically overinvestment or underinvestment. Therefore, Ma and Jeong (2022) argue that it is necessary to promote the efficiency of firms’ investment. In the same vein, Gaio et al. (2023) and Lambert et al. (2007) suggest that the increase in the quality of financial reports leads to relevant economic implications in firms, such as the efficiency of investments made. Moreover, Pereira et al. (2023a) find empirical evidence that Portuguese small and medium entities (SMEs) with higher levels of investment tend to have a more conservative accounting practice to capture investors’ confidence.

Conclusions

This study analyzes the effect of accounting information system quality on the investment level and investment efficiency of Portuguese SMEs. From the empirical evidence obtained in this study, it is possible to conclude that firms with a higher accounting information system quality have a greater tendency to invest. This can be explained by the fact that these firms with a higher accounting information system quality exhibit more reliable and transparent financial statements, so they convey greater confidence to investors and banks, and it is possible to attract more financing that can be subsequently allocated to investment in fixed assets.

To further develop the analysis, the association of accounting information system quality with investment (in)efficiency is analyzed. The results suggest that a lower accounting information system quality enhances the trend of overinvestment. In this sense, managers tend to report a better financial performance to capture more funds for financing investments. Therefore, if the financial statements do not report the true and fair view of the firms, managers may fall into the error of overinvestment, namely in projects with a negative NPV, which in turn may lead to a waste of resources and affect the survival and growth of the firms. Regarding the underinvestment, the lower quality the accounting information system, the lower the tendency for underinvestment. This result is the opposite to Linhares et al. (2018) and Verdi (2006) and may be explained by the fact that even if financial statements give the true situation, shareholders may not invest, even with positive NPV opportunities, if the indebtedness level is high, as it would imply that most of the benefits would be captured by the creditors (Pereira et al. 2023a).