The effect of accounting information quality and competition on investment inefficiency: evidence from Korea*

We examine whether either accounting quality or competition mitigates against firms' investment inefficiency, and whether the association between accounting quality and investment inefficiency depends on the level of competition. In this paper, an analysis is undertaken of firms listed on the Korean Stock Exchange (KSE) from 2000 to 2010. The Korean economy is characterized by the 'Chaebol' and dominated by a creditor-oriented financing system, such that creditors have strong control over firms' investment decisions. We believe that our own empirical results illustrate an interesting case study of the Chaebol-/bank-dominated economy, and provide additional data in this regard for academic research. Our results show that firstly, and as expected, accounting quality and competition mitigate against investment inefficiency. Managers of firms that have a higher level of accounting quality make capital investment decisions more efficiently, and their BODs monitor managers' decision-making more effectively. For a higher level of competition in a given industry, high liquidation risks force managers to decide on capital investment more efficiently. Secondly, it is shown that accounting quality causes improvements in investment inefficiency where the level of competition in a given industry is low.