Project-Level Disclosure and Investment Efficiency: Evidence From China

Abstract

Different from studies that use rough proxies for aggregate accounting information quality to investigate its impact on investment efficiency, we construct a project-level measure of disclosures pertaining specifically to firms’ ongoing and future investments, using a large sample of Chinese listed firms. We first validate this measurement of project-level investment disclosure, finding that more detailed investment disclosures are associated with stronger market reactions, particularly among strong-governance firms. Furthermore, we find that project-level disclosure is associated with higher future investment efficiency for strong-governance firms, but not for weak-governance firms. Investigations into underlying channels reveal that well-governed firms with more investment disclosures face less financial constraints and are more likely to abandon poorly performing investments. Cross-sectional analyses suggest that project-level disclosure and governance play a more important role in settings where firms have stronger incentives for opportunistic disclosure. Overall, our evidence indicates that project-level disclosure interacts with corporate governance to impact investment efficiency. The results have implications for disclosure regulation and practice.