The Effect of Financial Statement Quality on Information Assymetry and the Implications

THE EFFECT OF FINANCIAL STATEMENT QUALITY ON INFORMATION ASSYMETRY AND THE IMPLICATIONS ON INVESTMENT EFFICIENCY OF MINING COMPANIES

I Gst NgrAgung Suaryana1

I Gusti Ayu Nyoman Budiasih2

Ida Bagus Putra Astika3

1,2,3Faculty of Economics and Business Udayana University

E-mail:

Abstract

Presentation of qualified financial statements can lead to optimal investment activity through low information asymmetry between company and shareholders. The aim of this study is to determine the effect of financial statements quality on information asymmetry and its implications on investment efficiency. This research is conducted on mining companies listed in Indonesia Stock Exchange year 2013 – 2015. The sample are 69 companies with nonprobability sampling method, specifically the purposive sampling method. The data analysistechnique utilized is the path analysis. The analysis result found that the quality of financial statement has a negative effect on information asymmetry. Information asymmetry has a negative effect on investment efficiency. The quality of financial statements has a positive effect on investment efficiency. Qualities of financial statements have partial indirect effect on investment efficiency through information asymmetry.

Keywords: information asymmetry; investment efficiency; quality of financial statement

INTRODUCTION

The capital market has an important role for companies and investors in regards of investment activities. Investment is the allocation of funds owned by individuals or organizations in a certain period with the intention to gain return from an amount of fund that has been allocated. The investment activity by the company must be efficient, or in other words must avoid underinvestment and overinvestment conditions. The condition of underinvestment is a condition in which the company has missed the opportunity to make investment that would result in positive net present value (NPV). The company is said to miss the opportunity to invest in a project with positive NPV, if the company does not have enough fund to carry out the expected investment, so the company must find an alternative to attain additional funds. The condition of overinvestment reflects that the company has excess fund (free cash flow), a condition in which the company is at a mature stage so that the company has low investment opportunity or it can be said that the company is facing investment opportunities on projects with negative NPV (Sari & Suaryana, 2014).

Financial statements are written reports that provide information regarding the financial position of a company and is used as a basis for making decisions. The disclosure of financial statements by the company is a form of the company’s responsibility to determine the right investment decision. High quality financial statement means that the financial statement has present the actual condition of the company.The presentation of a qualified financial statement can reduce information assymetry between the management of a company and the shareholders (Wang et al., 2015). Companies are demanded to provide qualified financial statements with low information assymetry so that it can be a mediator in the investment activities conducted by the company (Tao Ma, 2012). Different from the research result by Nurcholisah (2016) that shows that financial statements quality does not affect information asymmetry of pension fund companies in Indonesia.

One of the factors why investment activities are less efficient is because there exits information asymmetry that may cause difference in information between the company’s management and the shareholders. According to Lingmin (2013), the high level of information asymmetry may decrease investment efficiency of a company. Different from the researchconducted by Nurcholisah (2016), information asymmetry can be minimized if a company provides qualified financial statements and increase their monitoring function towards the company’s management (Beatty et al., 2009).

The higher the quality of financial statements, the more efficient investment activities would be, because this reflects the real condition of the company. Qualified financial statements directly showed that the company’s management is accountable making it easier to see investment opportunities (Bushman & Smith, 2003).

Qualified financial statement will affect the attainment of balanced information, so that shareholders will know the real condition of the company. Qualified financial statement through low information asymmetry will affect investment efficiency. According to Amrullah & Fatima (2015), financial statement quality can decrease information asymmetry in which afterwards decreases investment inefficiencies. Investments performed by a company can be said to be efficient, if they can avoid the conditions of underinvestment and overinvestment (Sari & Suaryana, 2014).

The motived in this research is to examine the effect of financial statement quality on information asymmetry and the implications on investment efficiency in mining companies. The researcher chose mining companies listed in Indonesia Stock Exchange, because the phenomena stated above and the inconsistencies from previous research results.

The research problem formulations are; does financial statement quality have any effect on information asymmetry, does information asymmetry have any effect on investment efficiency, does financial statements quality have any effect on investment efficiency, and does financial statement quality have any indirect effect on investment efficiency. The aim of this research is to attain empirical evidence regarding the effect financial statement quality has on information asymmetry, the effect information asymmetry has on investment efficiency, the effect financial statement quality has on investment efficiency, and the indirect effect of financial statement quality on investment efficiency.

The research benefit is expected to be in the form of theoretical benefit and practical benefit. This research is expected to provide additional reference regarding the effect financial statement quality has on information asymmetry between the company’s management with shareholders and the implications on investment efficiency. Based on the agency theory, there is a difference in interest between the agent and the principal which would cause agency problems to occur. An effort that can be done is by improving the financial statement presentation so that there is no difference in information and so the investment activity can be more efficient.

The practical benefit of this research for companies is that it is expected to be able to provide additional references regarding optimal investment achievements for the companies through minimization of information asymmetry by increasing the quality of the financial statement. For shareholders, this research is expected to provide information to be considered by shareholders in making investment decisions. For regulators, this research is expected to be a material to consider in making policies related to the effect financial statement quality has on information asymmetry and the implications on investment efficiency.

LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

The agency theory is a contract that binds the agent (management of the company) and the principal (shareholders), where the principal grants full authority to the agent to carry out a number of jobs under the name of the principal (Jensen & Meckling, 1976). The main principal of agency theory is that there is a work relationship in the form of cooperation contract between the principal and the agent (nexus of contract). The principal and the agent involved in the contract will attempt to maximize their respective interests, which would cause the emergence of agency problems.

A company that presented qualified financial statements would easily be able to know the company’s performance. Through high quality financial statements the information asymmetry can be reduced, this means that there is no difference in information between the company’s management side and shareholders. According to Cohen (2006), a qualified financial statement presentation is expected to decrease information asymmetry between company’s management and shareholders. The result of the research conducted by Setiany Wulandari (2015), shows that financial statements quality has a negative effect on information asymmetry. A research by Fanani (2009) also shows the same research result, that a qualified financial statement presentation can decrease information asymmetry. The research results above have differences with the research conducted by Indriani Khoiriyah (2010) that shows that quality of financial statements which comprises of value relevance, timeliness, and conservatism has positive effect on information asymmetry. Research by Santoso (2012) shows that quality of financial statement does not have significant effect on information asymmetry. Based on the above discussion, the hypothesis proposed in this research is as follows:

H1: Quality of financial statement has negative effect on information asymmetry.

Investment activities become efficient if the information obtained by the management of the company and shareholders are in balance, so that there is a low probability for the company’s management to perform the act of manipulating financial statements. Low information asymmetry between management of the company and shareholders can increase the investment efficiency because shareholders have more information about the actual condition, so that investment activities performed can be avoided from underinvestment or overinvestment conditions.

The result of a research by Lingmin (2013) shows that lower information asymmetryhas negative effect on a company’s investment with overinvestment conditions and has positive effect on a company’s investment with underinvestment conditions. There is a difference with the research conducted by Nurcholisah (2016) that shows that informationasymmetry does not have any effect towards investment efficiency. Based on the discussions above, the hypothesis proposed in this research is as follows:

H2: Information asymmetry has negative effect on investment efficiency.

Financial statements quality is among the indicators of the success of investment activities performed. The measure of quality of financial statementscan be reflected by the accrual quality. A company with high level of accrual, shows that management has performed manipulative actions causing the financial statement quality to be low. According to Butar (2015), financial statements have an important role in minimizing company’s investment inefficiencies that are due to overinvestments. Previous research found that financial statement quality can increase investment efficiency (Biddle & Hilary, 2006; McNichols Stubben, 2008) and high financial statement quality has positive effect on investment efficiency, both in conditions of underinvestment as well as overinvestment (Chen et al., 2011; Gomariz Ballesta, 2013). The research conducted by Rahmawati Harto (2014), and Sakti (2015) also show that financial statement quality has positive effect towards investment efficiency.

Different from the result of a research conducted by Setyawati (2015), that states that financial statement quality does not have any significant effect on investment efficiency. The result of a research by Sari & Suaryana (2014), states that financial statement quality which is proxied with discretionary accrual has negative effect towards underinvestment conditions, while financial statement quality does not have any effect in the case that a company is experiencing overinvestment condition. Based on the discussion above, the hypothesis proposed in this research is as follows:

H3: Financial Statement Quality has positive effect on investment efficiency.

Financial statement quality becomes a factor that must be considered by the company in making investment decisions because it can minimize the information asymmetry between the company’s management and shareholders. This is because the financial statement presented reflects the actual condition of the company so that between the management and shareholders there are no differences in information or in other words, are treated equally. Information asymmetry is said to be low if the financial statement is presented with quality so that investments performed by the company can be optimal and efficient.

Financial statement presentation with greater quality is indirectly able to increase investment efficiency through low information asymmetry between the company’s management and shareholders. This is because financial statement quality presents qualified information such that this minimizes information asymmetry. Low information asymmetry between the company’s management and shareholders may cause the investment activities performed by the company to be efficient because it is in accordance to the actual condition. Based on the discussions above, the hypothesis proposed in this research is as follows:

H4: Financial statement quality has indirect effect on investment efficiency.

RESEARCH METHOD

This research used the quantitative approach in the form of associative. The research location is in the mining sector companies listed in Indonesia Stock Exchange from the year 2013-2015 through the official web www.idx.co.id. The research object is financial statement quality which affects information asymmetry and it’s implications on investment efficiency. The type of data is quantitative data and the source of data is secondary data. This research uses financial statement quality as the independent variable, information asymmetry as the mediating variable, and investment efficiency as the dependent variable. The population of this research is all companies in the mining sector listed in Indonesia Stock Exchange from the year 2013 until 2015, which totals up to 41 companies. The process of determining the sample is by the nonprobability sampling method using the purposive sampling technique resulting with 69 sample using three years of observation. The data collection method is by nonparticipant observation.

There are some criteria in determining the sample, and the first criteria is that it must be a mining company that has published audited annual financial statement in the years of 2013-2015. The second criteria is that the mining company, in it’s annual financial statement, must present complete information which is needed to calculate the variables in this research. The total population of this research is 123 companies, however there are 21 companies that do not publish audited annual financial statement in the years of 2013-2015 and 33 companies in the presentation of it’s financial statement does not provide complete information to measure the research variables. Hence, the total research sample withthree years observation is 69.

The data analysis techniques used in this research are the descriptive statistic, classical assumptions test, and path analysis. The path analysis model that follows Solimun’s Model (2010) is as follows.