Financial Literacy as a Tool for Stimulating the Investment Behaviour of Rural Women: An Empirical Assessment

*Bhaskaran Rajan, Navjot Kaur, Harpreet K. Athwal, Afzalur Rahman and Velmurugan P.S.*

### **Abstract**

Clapping with two hands create the sounds. Similarly, investment and saving behaviour are considered as the most vital elements for economic growth of an individual. This paper is to evaluate the influence of financial awareness on saving and investment behaviour of rural females in India. Investment pattern serves as a link between savings and wants of the common people. Economic growth of any nation can be critically measured through capital accumulation and investment trends in financial markets. In the present study, the investment behaviour on effect of financial awareness of 335 rural women in Jalandhar district has been evaluated. The relationship of financial literacy and saving & investment behaviour is also evaluated in the context of five basic domains of financial behaviour, such as demographic variables, financial control, financial planning, financial product selection and financial literacy. Results of the study revealed that rural women are conscious about the availability of various investment avenues in the market, but their investment pattern is still followed by some factors like familiarity, safety and assured returns, etc. This study suggests policymakers to focus on financial awareness rather to focus only on financial literacy.

**Keywords:** financial awareness, financial literacy, investment pattern, saving behaviour, rural women

### **1. Introduction**

Women consist of half of the world population and it is an open secret that an independent and educated woman leads an educated and self-reliant family, which is further translated into a liberal, independent and an educated society. As per census of 2011, in India, the female population was 586.4 million (48% of the total population). Out of these total female population, 405.1 million (69% of the total female population) were living in rural areas [1]. Without women contribution or support, it is not possible to develop the country as a whole because half of the nation's human resources is women. Therefore, women are playing a very important role in the socioeconomic development of the country.

The constitution of India honours both men and women with equal rights. But women are not treated as equals as men [2]. Certain barriers still exist between men and women. The literacy level of the rural women population is less than that of urban women population. During 2009–10, 46.7 % of rural women population was illiterate as reported by the National Sample Survey Office [3].

Generally, the rural women face problems with regard to medical facilities, health care, malnutrition, environment, etc. Besides, finance is an essential part of their life. Hence, different financial inclusion programmes were launched by the Government for the rural population at different periods. Financial literacy is an integral part of the financial inclusion programme. It was introduced to rural women for the purpose of understanding the financial concept thoroughly and guiding them to take a decision on financial aspects [4]. This programme cultivates saving habits among the rural women. Also, it helps them to understand the financial affairs and motivate them to invest the savings in a profitable avenue.

Now-a-days, the financial institutions are offering a variety of schemes/products to the public. A careful selection of the product is important; otherwise, it leads to loss of their hard earned money. A large number of literature reports [5] that in India, financial literacy is not well developed particularly in rural areas and they are still waiting for revolutionary push. The purpose of the study is to investigate whether the learned knowledge on financial literacy by the Indian rural women population helps to invest their hard earned saving money in the profitable ventures or not?

### **2. Literature survey**

A study on financial awareness among the salaried class people was carried out by Bhushan [6]; Umamaheswari and Kumar [7]. The studies reveal that certain demographic factors like general education level, gender, income level, employment etc. affect financial literacy. The financial literacy level between the salaried class persons is also varied. Vasagadekar [8] has informed that a working woman who has less knowledge in finance, finds difficulty in managing a portfolio. Hence, they should evaluate the available avenues before making investment [9].

Subha and Priya [10]; Agarwalla et al. [11] have reported that there are certain factors which affect financial literacy level viz. general literacy, income level, age, employment and place of work. Hence the government should take some sort of remedial measures to enhance financial attentiveness.

A variety of investment and saving products are available in the financial market, but people are still least aware. Therefore, a proper awareness about the products, among the public either through TV or radio is required as reported by Trivedi and Trivedi [12]; Goel [13]; Jappelli and Padula [14]; Kudva [15]. Awareness about the various investment avenues brings positive change in the lifestyle and investment pattern of people [16]. Only a few investors are aware about the industrial securities and most of the investors believe that such securities are insecure one [17].

A systematic analysis of the behaviour of rural and urban investors in terms of education, health care services, financial activities and priorities was carried out by Kumar and Mukhopadhyay [18]. The analysis reveals that both groups made an investment according to their requirements and rural investors' especially rural women need certain help for making the financial decision.

The awareness level of investors in a metro city is found to be higher than the investors in rural area [19]. The reason is that the metro investors are more

*Financial Literacy as a Tool for Stimulating the Investment Behaviour of Rural Women DOI: http://dx.doi.org/10.5772/intechopen.94532*

concerned with financial gateways; news channels and finance or market related programs. In Pakistan, a study on impact of financial literacy on investment decisions was conducted. This study reveals that financial literacy has a positive trend on agreeableness, extraversion, openness and negative trend on neuroticism [20].

The difference between the saver and investor was clearly mentioned by Thilakam [21]. The investment decision made by the investors is fully based upon risk bearing, yield amount and their future plan [22, 23]. If they are aware of the basic concepts of finance under present condition, it helps them to identify the best investment opportunities [24].

Bhattacharya [25] has stressed that the financial literacy is an important requirement for resource planning. The investment behaviour of investors in India varies from time to time. Thulasipriya [26] has informed that in earlier stages, the investors invested in physical asset than financial assets. Later stage, their preference changed from physical assets to financial assets. Sharma and Pandey [27], Palanivelu and Chandrakumar [28] have expressed that Corporate bonds; postoffice schemes; debentures; and bank deposits are the most promising investment avenues for the investors and more number of investors prefer these avenues. The rural people in India prefer to invest their savings in bank, insurance and post office only not in Public Provident Fund, Mutual Funds and Industrial Securities for the purpose of safety and security [29].

### **3. Scope of study**

Financial literacy is an energetic universal concern. Availability of large number of financial resources, different financial schemes and low level of financial awareness has led to financial literacy. Earlier studies have mainly concentrated on investment behaviour of women. Most of the studies concluded that investors are interested in investing their savings in banking, insurance and post office schemes. No in depth study has been carried out on impact of financial literacy on investment behaviour of rural women. Scope of this study is to develop a model for assessing the level of financial literacy and to apply the same among the rural women of Jalandhar district in the state of Punjab.

### **4. Objectives**

The main objective of the present study is to assess the relationship between the financial literacy programme and the investment behaviour of rural women. The sub objectives of the present study are:


### **5. Research methodology**

### **5.1 Sample size**

Jalandhar district of Punjab has been selected as a sample district for this study. This district has five tehsils namely Jalandhar 1, Jalandhar 2, Nakodar, Phillour, and Sahakot. The present study attempts to evaluate the impact of financial literacy programme on investment behaviour of rural women. Hence, 2.5% of the potential rural women savers have been selected from each tehsil randomly. The total sample size is 335 rural women respondents.

### **6. Analysis and interpretation**

### **6.1 Socio-economic factors**

In respect of a wide diversity in socio-economic factors, the sample was drawn out of five tehsils in terms of rural women population across Jalandhar district. Data was collected through questionnaire. Age, occupation, education level, number of dependents, monthly income of family and the type of family were demographic traits on which data was collected. In addition to demographic attributes, the target group was required to respond on questions related to financial behaviour, financial planning and financial literacy. Details about the demographic variables of the respondents are shown in **Table 1**.

### **6.2 Awareness of investment avenues**

The largest numbers of investment avenues are available in financial markets to serve the desires of investors. Thousands of investment schemes are available in the market. The art of rational investment decision is maximum returns with minimum of risk. Investment pattern differs from one another in terms of invested amount, risk bearing capacity and expected returns. In recent times, awareness about financial products has become an issue of discussion in financial markets. Past studies have revealed that people prefer to invest in traditional safe investment avenues. Bank, insurance and post office investment schemes were the most preferred investment avenues. There is an information gap between financial markets and a financier and due to this a majority of investor does not use modern investment products. Data collected under this section confirms that there is imbalance inbetween traditional and modern investment avenues. As we can figure out easily that awareness level of respondents is fairly high in banking avenues, post office schemes, insurance schemes and other traditional avenues like gold/silver and real estate opportunities. On the other hand as evidenced in **Table 2**, there is lack of awareness in Chit Fund Schemes, Bonds, Debentures, Public Provident Fund, National Savings Certificate, Government Securities and Forex Market and Commodity Market. It is also stated by Mohd and Verma [29].

In terms of familiarity with financial products, data collected from the respondents revealed that rural female are most familiar with savings account (99.7%), followed by fixed deposit (99.4%), post office schemes (98.5%), life insurance (98.2%), real estate (94%) and gold/silver (91.9%) trading options. Furthermore, it is reported that rural females are most familiar with bank, post office, insurance and other traditional avenues of investment. Although, data do notreveal high familiarity of rural females with Debentures (58.2%), Bonds (57.9%), Forex Market


*Financial Literacy as a Tool for Stimulating the Investment Behaviour of Rural Women DOI: http://dx.doi.org/10.5772/intechopen.94532*

### **Table 1.**

*Details of demographic variable.*

(40.3%) and Commodity Market (28.7%) in moderate risk avenues. But marginal divergence is found among respondents about few investment avenues like Mutual Funds (77.6%), Equity Share Market (74%), Public Provident Fund (63.3%), National Savings Certificate (62.7%), Chit Fund (62.1%) and Government Securities (61.5%).

### **6.3 Investment pattern**

Investment pattern refers to the outline of savings into various financial products with the objective of risk diversification or high expected profits. The very first step for voyage investment is savings. Investor can take the benefit of large chunk of financial products only if he/she is aware about the relevance of portfolio or diversified pattern of savings. The current investment pattern of selected rural women respondents are represented in **Figure 1**.

From **Figure 1**, it is revealed that most of the female respondents are investing in Savings Account (96.7%), followed by Bank Fixed Deposit (84.2%) and Life Insurance (81.5%). These three are found to be the most prominent investment avenues in pattern of rural females. Post Office Savings (56.4%), Mutual Funds (57.3%) and Gold/Silver (53.1%) are found less popular in the investment pattern of rural


**Table 2.**

*Awareness about investment products.*

### *Financial Literacy as a Tool for Stimulating the Investment Behaviour of Rural Women DOI: http://dx.doi.org/10.5772/intechopen.94532*

females. On the other hand, KisanVikasPatra (2.7%), Government Securities (10.1%), Debentures (6.3%), Bonds (4.2%), Commodity Market (2.1%), National Saving Certificates (0.9%), Chit Fund (0.6%) are preferred by very few persons to diversify their portfolio.

### **6.4 Components of financial attitude**

The reason for the selection of the financial instrument by the rural women is presented in **Figure 2**.

From **Figure 2**, it can be concluded that familiarity with any financial institution influences most of the times investment decisions of investors. 34% of total females have selected a financial institution because of familiarity, followed by the reason of assured returns. 23% of respondents has selected only those financial products which assure return on their investment quantum. 22% of respondents have preferred to select a number of financial products. Here, portfolio diversification is the main aim of investment. Interestingly, safe and low risk factors have the lowest preferred reason for financial selection. Only 21% of people has invested in safe and low risk investment avenues.

### **6.5 Statements describe the financial selection of rural females**

Financial and investment behaviour of a person is a vital component in a given financial environment. Investment pattern is affected by the awareness about the financial markets and the ability to make rational decisions. Hence, the variable behaviour prior to the selection of investment policy was investigated for this research. Data related to behaviour and rationality prior to financial selection is presented in **Figure 3**.

**Figure 3**, illustrates the behaviour-wise allocation of responses. Among 335 households'surveyed 36.40% of respondents have preferred different financial or investment policies from one company only. It is clear that most of the respondents trust in the investment policies of only one company. 34.30% of responses belongs to those households who never compare different investment policies of one or more companies. They prefer to invest in pre-selected avenues. Consequently, 20.60% households compare various products from more than one company and 8.70% of sample population are found to be unaware of the availability of different financial avenues in the market.

**Figure 2.** *Reason behind financial selection. Source: Primary data.*

**Figure 3.**

*Behaviour of rural women with reference to product choice. Source: Primary data.*

### **6.6 Financial literacy scale**

Financial literacy is the ability of a layman to understand the nature of finance and earning potential of his savings. In true sense, financial literacy allows a person to take a rational financial decision in specific areas like property or real estate matters, tax planning, banking and insurance and capital markets, etc. To achieve financial goals, basic knowledge about financial matters becomes the essential part of today's world; not only for the investors of stock market; but also for the persons having saving habits. It can be defined as the tricks used by the finance player to manage their earnings in terms of savings, budgeting, investing and insuring etc. Definition of financial literacy also declares that financially knowledgeable people are well aware about money management concepts and know in which manner financial institutions work. The financial literacy score is a platform to identify trends of financial awareness among individuals. To depict awareness trends in basic financial matters, financial literacy index of rural women was calculated. The financial literacy index is prepared on the basis of following basic financial literacy indicators:


*Financial Literacy as a Tool for Stimulating the Investment Behaviour of Rural Women DOI: http://dx.doi.org/10.5772/intechopen.94532*

In order to determine the financial literacy level, a set of question was asked and based upon the response, a rank was assigned. The rank "0" is assigned to the respondent who does not have knowledge about financial literacy. The ranks "1" and "2" are assigned for those having average and thorough knowledge on financial activities, respectively.

After assigning rank for the all the parameters, the total financial literacy score for the individual respondent is calculated as follows:

$$\text{Literacy Score} = \left(\frac{\text{Actual value} - \text{Minimum value}}{\text{Maximum value} - \text{Minimum value}}\right), \tag{1}$$

where 'actual value' is the sum of ranks the individual respondent scored, 'maximum value' is the theoretical maximum, here it is = 20, (that is 10 � 2) and 'minimum value' is the theoretical minimum, here '0' (i.e., 10 � 0).

In order to get the net score, Total of the literacy score all the respondents is divided by the total number of the respondents.

If the value is 0, it indicates that the financial literacy level is zero. Between 0.1 and 0.33 it specifies that level of financial literacy is at a minimum. Between 0.34 and 0.66 the level of financial literacy is of medium level. Between 0.67 and 0.99 the level of financial literacy is high and if the value is 1, it indicates that complete financial literacy level is achieved.

The calculated value of financial literacy is 0.69552. This revealed that the overall level of financial literacy is encouraging in rural parts of Jalandhar district. This indicates that efforts of government and non-government organisations are leading to a positive change. The results of financial literacy index are given in **Table 3** and **Figure 4**.

From the data collected from rural women of Jalandhar district, on the basis of combination of ten questions, it is revealed that the majority of respondents are falling in high level of financial literacy group followed by 38% of our total respondents who are coming under medium level of financial literacy.

Some differences concerned with investment pattern and financial selection include risk and portfolio choices. Choice of the portfolio, the level of risk bearing capacity is more concerned with the financial awareness of households. It is indicated that most of the rural females are aware of the ideology and framework of taxation (91%), Affordability and Financial security (73%). 72% of respondents confidently answer the calculation of simple interest rate. While portfolio diversification (64%), product choice (63%) and loan ideology (48%) are found lacking in this context. While in some typical financial matters financial knowledge of rural women is found lacking. Those financial concepts are Compound interest rate (24%), financial knowledge to life circumstances (22%) and Credit card ideology (10%). **Table 4** is dictates the financial literacy score for selected financial concepts.

### **6.7 Relationship between financial literacy and investment pattern**

A financier, who is not financially literate, will not be able to select a suitable investment pattern. This behaviour is strongly evident in the rural society of India. Financial literacy is important not only for rural or uneducated one but even an urban educated can get him into financial suffering if he is not aware of financial concepts. The results highlight how important financial literacy is to make sound financial decisions. Financial control, Financial planning, Understanding of financial concepts and Selection of financial product are basic concepts to measure financial awareness of a person.


**Table 3.** *Sample of financial literacy index* 

*calculations.\*\**

### *Investment Strategies in Emerging New Trends in Finance*

*Financial Literacy as a Tool for Stimulating the Investment Behaviour of Rural Women DOI: http://dx.doi.org/10.5772/intechopen.94532*

**Figure 4.**

*Financial literacy index. Source: Primary data.*


### **Table 4.**

*Financial literacy score.*

For the purpose of finding out the relationship between financial literacy and pattern of investment, a correlation test is applied. Results obtained by correlation are given in **Table 5**.

From **Table 5**, it is observed that the value of correlation is 0.129. So it is evidenced that there is weak degree of positive correlation between financial literacy and investment pattern among rural females. The significance value revealed by


### **Table 5.** *Relationship analysis through correlation.*

correlation is 0.018 which is less than 0.05% level of significance. So it is strongly evidenced that correlation is statistically significant also.

### **7. Conclusion**

Financial Literacy is a vital element to predict households' financial attitudes in developing nations. Indeed, in Indian heterogeneous household, levels of financial awareness vary greatly. From the empirical study it is revealed that most of the investors select financial institutions because of familiarity and their portfolio selection is largely based on comparison of number of financial products issued by the same familiar financial institution. So, guaranteed return, safety and diverse portfolio selection are contributing at large to describe the investment attitude of women.

The study reveals that there is a relationship between financial literacy and investment behaviour of the rural female. Through financial literacy programme, majority of the respondents (62% of total) have acquired more knowledge on financial concepts such as taxation, financial security, calculation of interest rate etc.

The awareness level of rural females in Investment Avenue is fairly high in banking avenues, post office schemes, insurance schemes and other traditional avenues like gold/silver and real estate opportunities. Their awareness level in investment avenue is very low in chit fund schemes, bonds, debentures, Public provident fund, National savings certificate, Government securities and Commodity market.

A website as a financial literacy guide was released by the Reserve Bank of India on 31st January 2013. This website was developed as a complete financial awareness guide and banks are advised to use this website as a fundamental curriculum to communicate basic financial knowledge. This financial literacy guide provides operational guidelines to organize financial awareness camps, as an initiative towards financial literacy.

Besides, various measures adopted by government and non-government institutions towards financial literacy, the results of the study reveal that still the investment pattern of rural women is followed by traditional avenues of investment. This, it is suggested to financial literacy program organizers to focusing on preferences and investment attitude of micro level segment investors. Hamza and Arif [20] have also suggested that policymakers and managers need to focus on profiling investors based on their status. It is strongly suggested to the program organizers to pass information on issue of budgeting, portfolio diversification, effective credit card management and loan ideology.

*Financial Literacy as a Tool for Stimulating the Investment Behaviour of Rural Women DOI: http://dx.doi.org/10.5772/intechopen.94532*

### **Author details**

Bhaskaran Rajan<sup>1</sup> \*, Navjot Kaur<sup>2</sup> , Harpreet K. Athwal<sup>3</sup> , Afzalur Rahman<sup>4</sup> and Velmurugan P.S.<sup>1</sup>

1 Department of Commerce, Central University of Tamil Nadu, Thiruvarur, India

2 College of Business and Law, University of Canterbury, New Zealand

3 KPMG LLP, USA

4 Department of Commerce, B.S. Abdur Rahman Crescent Institute of Science and Technology, Chennai, India

\*Address all correspondence to: askaraudit@yahoo.com

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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### **Chapter 5**

## Accounting Information Quality and Investment Decisions

*Nouha Khoufi*

### **Abstract**

Accounting information quality has been said to play an important role in reducing information asymmetry. Thus, firms with high accounting information quality may enhance more investors' decisions. This paper aims to empirically examine the association between accounting information quality and investment decisions among firms in Tunisia. The sample of this study consists of 50 firms listed on the Tunis Stock Exchange covering 2012 to 2016. The findings imply that accounting information quality is significantly negatively related to investment inefficiency. The inclusion of control variables and the use of alternative models to measure accounting information quality provide consistent findings. This paper has several important contributions. First, this paper provides new empirical evidence in an emerging market. Although emerging markets make up the vast majority of economic activity around the world, they have received limited attention in academic research. Second, this paper can also help researchers to better understand and realize the governance role of accounting information, and push them to investigate the other role of accounting information deeply and broadly.

**Keywords:** accounting information quality, investment inefficiency, agency costs, financial constraint, asymmetry

### **1. Introduction**

Many researchers have explored that the major objective of accounting information was to help its users make informed decisions. In addition, high-quality accounting information can also inform investors in a timely manner about the orientation of the firm's capital investments and help them to supervise managerial activities. Similarly, Bushman and Smith [1] find that high-quality information disclosures are beneficial to investors by monitoring management, encouraging them to make investment decisions efficiently and effectively and finally improving capital allocation efficiency and gaining more returns to investors. Houcine, [2] argue that investors are concerned with the quality of accounting information because it helps them to better understand the company's operating situation and other fundamentals. Therefore, high-quality accounting information affords external stakeholders a comprehensive understanding of firm fundamentals and allows them to take action to supervise management behavior.

An investment decision basically consists of the process of accepting or rejecting a particular investment project. Thus, it can be noted that, from a theoretical point of view, the decision is simple: projects for which the return is greater than the opportunity cost must be accepted, while others must be rejected. In real life, this process is not so easy, since the decision to accept or reject a project can be influenced by agents' interests in the decision-making process. Thus, accepting economically unviable projects or rejecting economically attractive projects can occur when the outcome of such deliberations offers benefits to decision makers, even when it causes losses to shareholders [3].

Firms use accounting information in investment decision-making to whether invest in physical project or invest in capital market. Firms need to invest in efficient investments with positive Net Present Value (NPV), and let go projects with negative NPV for better future growth and expansion. Accounting information is therefore important to facilitate informed decision [4].

This main objective of this study is to investigate the association of accounting information quality and investment decision using firm level observations in an emerging market such as Tunisia. The primary reason for choosing Tunisia is that we found an interesting research track in order to test the economic consequences of the quality of financial information in such an environment. Especially, in the face of this increasing doubt done over the quality of accounting results following the wave of financial scandals whereby Tunisia was not spared with BATAM case1 . Also the Tunisian firms are characterized by a weak informational environment, namely a weak level of voluntary divulgation of information, little follow-up by financial analysts as well as quasi absence of media coverage by the economic and financial press, that turns the accountable information a component relatively more dominant among the set of information used by the different users of financial statements in their decision-making process [5].

The paper is organized into five sections including this introduction. Section 2 presents a brief theoretical framework discussing the determinants of the quality of accounting information, and the relationship between accounting information quality, investment decision, and financial constraint. Section 3 explains the empirical methodology, including the choice of variables and data issues. Estimation results are presented and discussed in Section 4 and we concluded in Section 5.

### **2. The association between the quality of accounting information and the investment decision**

One of the main objectives of accounting information is to provide information that can facilitate the efficient allocation of capital. In other words, quality of financial information should be one of the most important inputs in decision-making regarding capital allocation that is investments [6]. The Financial Accounting Standards Board (FASB) states that one objective of financial reporting is to help present and potential investors in making rational decisions for investment. Firm is seen as investing efficiently if it invested in projects with positive Net Present Value (NPV). If the firm passed up on investment opportunities that would have positive NPV, then the firm was under-investing. On the other hand, when firm invests in investments with negative NPV, the firm was over-investing. Under or over-investment indicate that the firm is not investing efficiently. Hence, the level of firm's investment efficiency can be gauged from the absence of under or overinvestment [1].

Based on 3600 firm-year observations of A-share listed companies on the Shanghai and Shenzhen exchanges from 2004 to 2006, Li [7] examines the

<sup>1</sup> It is a manipulation case of accounts that auditors, such as in the Enron case in the United States, did not report in time and that took on the emergence of a real financial scandal, affecting the credibility of the stock market as well as weakening seven local banks.

influence of accounting information quality on the under- and over-investment of listed companies. His results show that high-quality accounting information reduces the risks of moral hazard and adverse selection and inhibits both under-investment and overinvestment by ameliorating contracts and supervision, thereby improving capital allocation efficiency at the company level.

### **2.1 Quality of financial information, capital cost and information asymmetry**

The accounting The accounting information represents an important source of information specific to the company that tends to reduce the level of information asymmetry between investors and the company and therefore contributing to a better functioning of financial markets [8].

Under lower external financing costs and investor's capital rationing, there is less possibility that managers pass up investments with positive NPV (lower under-investment). According to Jensen [9], lower adverse selection opportunity decreases the opportunity for managers to engage in value-destroying activities and self-maximizing decisions such as build an empire-building with ample capital (less over-investment).

Therefore, Easley and O'Hara [10] show that poor quality of accounting information leads to an undiversifiable information risk between informed and uninformed investors, thus increasing the cost of capital. On the other hand, the publication of better financial information in terms of quality and quantity would reduce this level of risk and therefore the cost of capital. Similarly, Yee [11] asserts that poor quality of the published information is considered to be a non-diversifiable risk factor leading to an increase in the risk premium, a component of the cost of capital. Also, Lambert [12] demonstrate how better quality of information accounting disclosure consents to reduce systematic risk by changing the perceptions of different stakeholders in the financial market regarding the distribution of future cash flows, and as a result, attenuating the cost of capital. For his part, Suijs [13] illustrates that better quality of financial information reduces the cost of capital by lowering the volatility of securities by improving risk sharing between generations of investors.

As well, in the light of literature developed above and empirical works, if a better quality of accounting information published, namely in terms of reliability, enables to reduce the levels of information asymmetry, and so the capital cost, it will be associated with a better decision of investment, facilitating the access to external funding sources for companies with a less cost, and consequently to reduce under-investment. Such an association was documented as well over the emerging developed markets, from which, we suggest testing the following hypothesis:

**H1***:* **A better quality of published accounting information is negatively associated with under-investment.**

### **2.2 Quality of financial information, agency costs and control of managers**

According to previous studies from the perspective of agency theory, the main reason for financial information is to alleviate the problem of information asymmetry by increasing shareholders, creditors, and others access to information about a company.

As the access to the accounting information increases, the privileged position held by managers in relation to private information decreases [9]. Based on this assertion, the accounting information is currently used as an input within contracts of inciting remuneration in order to motivate the managers to act in the interest of stakeholders and constitute an important source of information on which governance organs are based on controlling managerial activities [1, 2].

For instance, several past studies find that accounting information is used by shareholders to monitor managers [1, 12] and it is an important source for investors in monitoring firms' performances [4, 14]. Therefore, if higher financial information quality improved investors and shareholders ability to monitor managerial activities and detect their dysfunctional behavior such as over and under-investment, it could lead to managers investing more efficiently.

Based on the above theoretical arguments, we tend to check the hypothesis below:

### **H2***:* **A better quality of published accounting information is negatively associated with over-investment.**

### **3. Research methodology**

### **3.1 Sample and data collection**

In order to test our hypotheses in the Tunisian context, we select a sample of 50 companies listed on the Tunisian Stock Exchange (TSE). This number is limited because we have eliminated the financial companies due to their specific financial data. This study is based on observations from 2012 to 2016. The data are collected from the publications of the sample companies (annual reports, prospectuses…) available at the Financial Market Council, among some brokers or some companies' websites and on the publications of the TSE.

**Table 1** provides distribution of the sample by industry based on the DataStream-industry classification. The sample is represented by 12 industries.

### **3.2 Investment decisions**

First, we tested the association between the investment decisions and the quality of accounting information conditional on the assumption that the company is in a situation more prone to over or underinvestment. Similar with past studies [6, 15],


### **Table 1.** *Sample distribution by industries.*

both overinvestment (positive deviations from expected investment) and underinvestment (negative deviations from expected investment) are considered inefficient investments. Specially, we use the model that predicts investment as a function of revenue growth. The model is described as follow:

$$\mathbf{Invest}\_{\mathbf{i},\mathbf{t}\ast\mathbf{1}} = \beta\_{\mathbf{i},\mathbf{t}\ast\mathbf{1}\ast} \,\mathrm{Rev}\mathbf{Group}\mathbf{th}\_{\mathbf{i},\mathbf{t}} + \varepsilon\_{\mathbf{i},\mathbf{t}\ast\mathbf{1}} \tag{1}$$

Where:

*Investi,t + 1 =* total investment expenditure for year t + 1, which relate to fixed capital investment and are measured by the difference between the gross values of fixed assets of t + 1 and t, deflated by the capital stock at the start of the period.

*RevGrowthi,t =* revenue growth and defined as percentage change in revenue from year *t* – 1 to *t*.

ε*i, t:* the residuals of the model, which represent the inefficiency of the investment.

Then, we will then use the residuals of model (1) as a specific proxy for the level of deviation of the company from its expected level of investment. The negative (positive) residuals from the regression model (1) indicate under investment (over investment). In our analyses, we use the absolute value of residuals as a proxy for investment efficiency.

Thus, based on the residual of the model, we could identify differences and make the necessary groupings, as shown in **Figure 1**.

### **3.3 Accounting information quality**

There is no universally accepted measure of accounting information quality [6, 16]. But no number could be as attractive to users of financial statements as the accounting result [16]. According to Francis et al. [17], the quality of accounting results has several attributes, namely reliability, relevance, conservatism, punctuality, smoothing, predictability and persistence. At the level of this research, we will in particular be interested in two attributes of the accounting result, namely: the quality of accruals and accounting conservatism. Our choice focused on these two attributes since it has been widely demonstrated by the various previous works [6, 15, 18, 19] that it is mainly these two attributes of the accounting result which improve the investment behavior of companies. Practically, a better quality of accruals increases the accuracy and reliability of accounting results, lowering the cost of capital and thus reducing underinvestment. On the other hand, a more conservative accounting result, allocates to governance bodies to exercise better

**Figure 1.** *Grouping of firms according to efficiency in investment decisions.*

control over managerial decisions, and therefore to reduce ex-ante their incentive and ability to undertake unprofitable investments.

### *3.3.1 Measure of the quality of accruals*

Managers can use their discretion to manipulate results via accruals and to alter the actual performance of the business. This is why the results, which quickly turn into cash flow, represent the most desirable quality of profits. Francis et al. [17], consider that this rapid transformation of results into cash flow, is at best captured by the model of Dechow and Dichev [20]. The DD model (2002) suggests that the quality of accruals is assessed by the degree of association between the change in total current accruals with cash flows from past, present and future periods. However, we will use the modified DD model (2002) as proposed by McNichols [21] to determine discretionary accruals. This model states that beyond cash flows, the change in net sales and the proportion of tangible fixed assets are variables important in forecasting with respect to currents accruals:

CUACC ß ß CFO ß CFO ß CFO ß ASi,t ß Asset . i, 0 1 i,t 1 2 i,t 3 i,t 1 4 **<sup>t</sup>** = + + + + + +ε − + 5 i,t i,t

*Where:*

*CUACC*i,t*:* the amount of current accruals of firm i for year t, calculated as follows: ∆ *CAit -* ∆ *CLit -* ∆ *LIQit* +∆ *DEBit.*

*Where:*

∆ **CAit***:* change in current assets between t - 1 and t;

∆ **CLit***:* change in current liabilities;

∆ **LIQit***:* change in liquidity t - 1 and t;

∆ **DEBit***:* change in current debts between t - 1 and t;

*CFO*i,t-1*, CFO*i,t *and CFO*i,t + 1*:* cash flow from operations for the years t-1, t and t + 1,

*AS*i,t: change in annual sales between t-1 and t;

*Asset*i,t: the proportion of tangible fixed assets in year t.

In this model, the absolute value of the residuals is used as a proxy the quality of accruals (QACC). We will multiply this value by (−1), so that a higher value corresponds to a better quality of the accruals, and therefore, of the accounting results. The quality of accounting information is therefore assumed to be inversely proportional to the company's propensity to manage the accounting result.

### *3.3.2 Measure of accounting conservatism*

At the level of the current research, we are going be interested in an attribute of accounting result, namely accounting conservatism. In fact, a more conservative accounting result, allocates to governance organs to exert a better control on the managerial decisions, and thus to reduce ex-ante their incentives and their qualifications in order to undertake non-profitable investments. Yet, we will specifically be interested in conditional conservatism. According to Gively, and Haynes [22], there are two types of conservatism: conditional and unconditional. Unconditional conservatism results in under-evaluation of the accounting value of net assets since the start of the economic activity of the company, because of the selection beforehand, of accounting conservatism methods. While under-evaluation of assets led by the conditional conservatism is attributable to the delay of accountability between latent losses and gains. As we prepare to show that through asymmetric recognition

### *Accounting Information Quality and Investment Decisions DOI: http://dx.doi.org/10.5772/intechopen.93980*

of gains and losses, this form of conservatism endorses a role of control on the activities of managers, namely those that are reattached to the investment decision. We will use the accumulation of non-current accruals, in view of apprehending the degree of conservatism for every company-year.

The current measure was initially developed by Givoly and Haynes [22] and then repeated by several authors [19, 23]. These latter argue that the underlying intuition behind resorting to this measure lies in the fact that it captures caution and vigilance such as the trends of accountants to require more auditing so as to recognize the good news in terms of financial statements and manage to anticipate bad news. In fact, non-current accruals comprise accounting posts subject to the application of the precaution principle, such as: provisions, change effects at the level of accounting estimation methods, losses on asset disposals, impairment of assets, etc.

Though these rubrics must be mandated by the Generally Accepted Accounting Principles, both the schedule and size of these loads/expenses, are left to the discretion of the managers, which makes them largely subject to their discretion and therefore constitutes a measure of accounting conservatism [24].

Non-current accruals *NCUACC* are measured by the difference between total accruals (net outcome– operating cash flow) as well as current accruals.

We will estimate the size of *NCUACC* over a period of 3 years, ranging from t-2 to t. To better facilitate the interpretation, we will multiply this value by (−1). Thus, positive values are synonymous with conservative accounting practices.

### **3.4 The control variables**

Consistent with past studies such as Verdi [3], Biddle et al. [15] and Chen et al. [6] following control variables are applied for this study:

**MTBi**,t = we retain the Market ratio to book as the first measure of growth opportunities. It was measured by Denis [25] via the rapport between the market value and the accounting value of proper capitals (*Market to book ratio*).

**XCE**i,t = done by Biddle et al. [15] we will include the sales growth as an additional measure of growth opportunities. It was measured by the variation of the company turnover between the year t and t-1.

**SIZE**i,t = logarithm of the total accounting asset. The firm size equally represents an explicative factor of investment expenditure, since it can have an impact on the access to external capitals.

**DEBT**i,t = ratio total debt divided by the total asset. With reference to Myers [26] the financial shift can lead to under-investment caused by the over-indebtedness problem.

### **3.5 Model specification**

To test our hypothesis on whether accounting information quality in year t affects investment decisions in year t + 1, we estimate a model that connects inefficiency of investment with the various measures of the quality of accounting information and a set of control variables. We will estimate a logistic regression in order to take counts the binary nature of our dependent variable, which predicts the likelihood that a firm will belong to one of the two groups.

This specification considers simultaneously, but separately, the probability of on and under-investment. The model to be tested is as follows:

$$\text{InvestIneff}\_{\text{i,t+1}} = \beta\_0 + \beta\_1 \text{ ACCUNQUA}\_{\text{i,t}} + \sum \beta\_j \text{ CONTR}\_{\text{i,t}} + \varepsilon\_{\text{i,t+1}} \tag{2}$$

Where,

*InvestIneffi,t + 1*: Inefficiency of investment represents over or under-investment which is a binary variable that takes the value of 1(0) if the residuals of the model (1) are positive (negative), 0(1) otherwise.

*ACCOUNQUAi,t*: the measurement of the quality of financial information, as described below.

**CONTR**i,t: different control variables, as defined previously.

### **4. Analysis of results**

### **4.1 Descriptive analysis**

**Table 2** shows that Tunisian companies have a poor quality of their accounting results compared to other countries. Indeed, the average of their accruals is around (−0.0322), this level is lower than that detected by Francis et al. [18] in the American context (−0.0442). At the same time, it appears from **Table 1** that Tunisian companies exhibit an average level NCUACC of (0.008), revealing that they practice low conservative accounting compared to the average value (0.01) detected by Xu et al. [19] on the Chinese market.

### **4.2 Multivariate analysis**

Before moving to multivariate analysis*,* it is first important to evaluate the multicollinearity by using Variance Inflation Factor (VIF), and the results show that VIF values are also relatively small and there is no multicollinerity issue among variables (**Table 3**).

**Table 4** presents the multivariate results in panels testing the relationship between the quality of the accounting result and the probability of under and overinvestment. The Logit model applied to panel data can be estimated using a fixed or random effect. If the estimation of fixed effects is adopted, the constant is treated as an unobservable characteristic specific to firm i in correlation with the other variables in the model.

Since the dependent variable is binary and the specific effect must be eliminated, only companies that have changed status from one period to another are taken into account in the estimate, which implies the exclusion of observations which have not changed over time [22].

On the other hand, if the estimate adopted follows a random effect, the constant is considered as a non-observable random variable and not correlated with the other variables, which allows it to be integrated into the model [27]. So for these reasons,


**Table 2.** *Descriptive statistics of variables.*


*Accounting Information Quality and Investment Decisions DOI: http://dx.doi.org/10.5772/intechopen.93980*

### **Table 3.**

*Tolerance values and VIF without bias.*

we opted to adopt the random effect model so as not to exclude observations that do not vary over time. Before interpreting our results, it is important to note that the prediction quality of our models is very strong (90%) and this, for the different specifications selected. The models also have very good overall significance, insofar as the likelihood ratio test (LR test) is significant at the 1% level.

It is possible to note in **Table 4** that the quality of the accruals increases the probability of underinvestment, while it has no significant impact on the probability of overinvestment. Our results can, however, be explained by the contextual specificities of the Tunisian market as well as the behavior of the Tunisian investor. Thus, we can first argue that the low quality of financial information displayed on average by Tunisian companies may explain our results.

In fact, according to the descriptive statistics, Tunisian firms display on average a lower quality of their accruals in comparison to American or Chinese firms. A priori, this level of quality does not seem sufficient enough in the eyes of the Tunisian investor, to constitute a means making it possible to attenuate the levels of asymmetry of information with regard to the firm, to reduce its cost of capital. Then, we can invoke the behavioral dimension of the Tunisian investor in the explanation of our results. Indeed, the latter may not have enough confidence in the accuracy of the financial information conveyed through the accounting results, so that it cannot reduce the levels of information asymmetry towards the firm. On the contrary, for the Tunisian investor, publicly disclosed financial information would increase the levels of information asymmetry, since the latter does not consider such information as a reliable source of information and would have more confidence in information collected on its own and through private channels. In fact, Loukil and Yousfi, (2012) [28] recently noted that the Tunisian investor has no confidence in the public information disclosed by companies and would have more confidence in private information. The authors specifically found that only private information reduces the levels of information asymmetry on the Tunisian stock market. As for accounting conservatism, it remains to have no effect on the probability of over and under investment. Such a result is contradictory to that found by Xu et al., (2012) [19] on the Chinese market, but can be explained by the low conservative accounting practiced by Tunisian companies in comparison to Chinese companies.

Furthermore, the results tell us that neither the quality of the accruals nor the accounting conservatism have a significant effect on overinvestment decisions. We can explain our results by the fact that the low level of accruals displayed on average by Tunisian firms, does not allocate to financial information to take on a governance role, to reduce the agency costs associated with the control of managers and to improve the selection process investment projects. In other words, the role of governance granted to accounting conservatism is conditioned by a set of control mechanisms, which are lacking in the Tunisian context.


*\*\*Coefficient significatif à 5%.*

*\*\*\*Coefficient significatif à 1%.*

### **Table 4.**

*Results of the estimation of the relationship between the quality of accounting results and the probability of under-investment and over-investment.*

With regard to control variables, the results show that the MTB, Cash-Flow and liquid assets ratios increase (decrease) the probability of overinvestment (underinvestment). While the size of the firm decreases (increases) this probability. As for the debt ratio, this variable persists in having no significant effect on the probability of over and under investment. These different results are similar to those found by Biddle et al. [19].

### **5. Conclusion**

This study focuses on the importance of the quality of accounting information quality on the investors' decisions making. Indeed, prior studies state that better financial information, contributes to making better investment decisions, as it reduces the level of information asymmetry. This finding can be explained by the fact that high-quality financial information facilitates the process of monitoring managers because, by reducing existing asymmetries, it inhibits opportunistic behavior, ensuring the rights of both shareholders and creditors. We are extending this current of research to the context of emerging market, particularly Tunisia, because of the importance of its challenges for businesses. In order to test our hypotheses, we have used two attributes of the quality of accounting results, namely: conditional conservatism and the quality of accruals.

The results of this study indicate that the quality of the accruals increases the likelihood of underinvestment. We attribute such a result to the lack of confidence that the Tunisian investor places in the accounting information vehicled through the

### *Accounting Information Quality and Investment Decisions DOI: http://dx.doi.org/10.5772/intechopen.93980*

accounting results. On the other hand, the results reveal that the quality of accruals has no effect in reducing the probability of overinvestment. The low level of accruals displayed on average by Tunisian firms could explain such a result.

Furthermore, we reveal that accounting conservatism has no significant effect and therefore cannot constitute a lever for action in improving the investment decisions of Tunisian companies. We can explain these results by the fact that the Tunisian firms practice a weak conservative accounting so that this level is not sufficient to allow this attribute of the result to assume an informational role allowing to attenuate the problems of asymmetry of information present between the firm and its capital providers.

Our findings suggest that countries, especially emerging markets, can benefit from improved financial information quality. Hence, these countries should take initiative to improve their market infrastructures such as adopting better accounting standards and encourage greater disclosure as well as enhancing the role of enforcement agencies. In addition to this, these findings could be of interest to the international organizations such as "World Bank" and "International Monetary Fund", whose missions are to aid countries with developing and transitional economy, and improve living conditions of their citizens. It is likely that more efficient investments will lead to better allocation of capital and resources and this may lead to higher social welfare. One limitation of this paper is that the relationship between accounting information quality and capital investment choice may differ with the different development stage of the industry. Maybe this issue is an important topic for future research.

### **Acknowledgements**

This study was supported by the University of Sfax and the GFC research laboratory (Governance, Finance and Accounting), for which we gratefully acknowledge.

### **Conflict of interest**

The author declares no conflict of interest.

### **Notes**


*SIZE* = logarithm of the total accounting assets of the firm; *DEBT* = total debts reported to the accounting value of the total asset.

3.The **Table 3** presents the results of estimates of panel logistic regression with random effects. The dependent variable is based on the unexplained level of investment. *UNDINSVT* = Firms classified among those which underinvest; *OVERINVST.*

### **Author details**

Nouha Khoufi University of Sfax(s), Tunisia

\*Address all correspondence to: nouhakhoufi@yahoo.fr

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

*Accounting Information Quality and Investment Decisions DOI: http://dx.doi.org/10.5772/intechopen.93980*

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## Section 3
