The effect of the quality of accounting standards and the level of compliance with their application on the efficiency of corporate investment - the role of the operating characteristics of companies as modified variables - an applied study on companies listed in the Saudi stock market

The study aimed to examine the impact of both accounting standards quality and the compliance level of applying the standards, as an approach to reduce the accounting expectations gap regarding the financial report, on the efficiency of management's investment. Then, the study examined the role of information quality as a mediating variable conveys an indirect effect of both the accounting standards quality and the compliance of proper application of standards on the efficiency of investment. In addition, the study examined the effect of some of the companies' operating characteristics (age, size, the level of investment in the previous period, and the operating cash flows) as moderating variables on the previous direct and indirect relationships. The path analysis through Structure equation modeling (SEM) was employed in the study to test, simultaneously, the direct and indirect relationships in the study model. The standard quality was measured by adopting international financial reporting standards (IFRS), and the compliance to applying standards was measured by the quality of the audit.
Using a sample of non-financial companies listed in the Saudi Stock market, the results showed that the adoption of IFRS (as a measure of the standards quality gap reduction) resulted in reducing the inefficiency of investment at the level of the whole sample, but that effect appeared only on the cases of under-investment rather than over-investment. However, the information quality did not play a mediating role to convey the impact IFRS adoption on investment efficiency.
The results also showed that the audit quality (as a measure of compliance gap reduction) had a significant impact on the efficiency of investment at the level of the whole sample, and also on the cases of both over-investment and under-investment separately. However, the result was counter-productive, that is, in the favor of non-big auditors. This result could be interpreted from two perspectives of the impact of audit quality on investment efficiency (Boubaker et al. 2018); the first is the impact of audit quality through its positive effect on the information quality (information quality effect), and the second is the effect of transferring expertise, advice and guidance. Loius (2005) has argued that non-big auditors provide advice and transfer their industry expertise to the client, formally or informally, as compared to big auditors. By merging these evidences together, it can be said that, according to the results of my study, the interpretation of the impact of the experience transfer was more significant and influential in the relationship between the audit quality and investment efficiency. To confirm this, the researcher used an alternative measure of the audit quality, which is industry specialization. The result indicated that there was a positive significant impact of the level of auditor specialization on the investment efficiency, which confirms the previous results.
The results indicated that the impact of the audit quality on the investment efficiency was direct, and there was no significant indirect effect through the mediating variable (information quality). Despite the positive significant impact of the audit quality on the information quality, this effect has not been reflected on the investment efficiency indirectly through the mediating variable. This supports the effect of experience transfer explanation over the effect on information quality explanation.
The results also shows that the interactive effect between adopting IFRS and the audit quality was significant and positive on the efficiency of investments only when audit quality was measured by industrial specialization. The results also indicated that some, but not all, of the tested operating characteristics had a significant effect on some direct relationships, and none of them had an effect on the indirect relationships through the mediating variable.