The Relationship Between Financial Reporting Quality and Investment Decision Making of Firms Listed at the Nairobi Securities Exchange

Abstract

The main objective of the study was to establish the effect of financial reporting quality on investment decisions of firms listed at NSE. While earnings management, conservative accounting and accrual quality were the independent variable, firm size was the control variable and investment decision was the dependent variable. The study was guided by agency theory, stakeholder theory, and the signaling effect theory. The study adopted correlational design with quantitative approach targeting 64 listed firms at the Nairobi Securities Exchanged (NSE). Census was used and thus all the listed firms were included in the study. The findings were that earnings management (p<0.05), conservative accounting (p<0.05), accruals quality (p<0.05) and firm size (p<0.05) were all significant. The study concludes that financial reporting quality significantly influences investment decision. The study recommends that finance managers of the listed firms in Kenya should try to minimize incidences and practices of earning quality management so as to support informed decision making among investors. The board of directors being the oversight body on behalf of investors should establish strong internal control systems among listed firms that would minimize earnings management thus allowing investors and shareholders to make rationale and informed investment decisions.