Investigating the Effect of Accruals Quality and Disclosure Quality on Labor Investment Inefficiency

Information asymmetry and conflicts of interest between management and shareholders lead to the phenomenon of moral hazard. Moral hazard means that the managers may make some decisions (e.g. investment decisions) that do not meet the interests of shareholders. Inefficient investment decisions include over or under-investment in firms’ labor and utilize the non-optimal number of human resources in business entity. One way to avoid inefficient investment decisions is providing the financial reporting quality; because the higher reporting quality increases the stakeholders’ ability to monitor the managers’ behaviors and decisions such as decisions on determine the number of labor in firms. This study investigates the impact of two measures of financial reporting quality (accruals and disclosure quality) on labor investment inefficiencies (include over and under-investment) in a sample of 107 firms listed in the Tehran Stock Exchange during 2003 - 2014. The research results show that the increase in accruals quality and disclosure quality decreases the labor over and under-investments inefficiencies and eventually, companies employ more optimal levels of human resource.