Several financial scandals, fraud and manipulation in different business entities has been observed in recent years. These sorts of financial scandals are mainly committed by the directors or chief executives belonging to the large companies. To commit these sorts of misdeeds, they have used different types of financial information manipulation and provided misleading information. Because of such practices, financial information quality has become such a crucial issue. There were many sequential events of accounting scandals during the period of of 19th and the 20th century, and various scandals questioned the quality of accounting information (Agrawal & Chadha, 2005). These scandals also indicate the weakness of corporate governance system which gradually ends up as agency problem. A better financial information system is to be developed to ensure the high quality of reporting. The financial statements should disclose relevant, reliable, comparable and understandable information (
The objectives of this research paper are to observe financial information quality and firm-specific characteristics of the cement sector in Bangladesh. This research will also try to find out the relationship between financial information quality and firm’s performance. Moreover, this study investigates the applicability of the Beneish M-score in finding out earning quality in the context of cement sector of Bangladesh.
In 1989, Cement Company first enlisted in the stock market of Bangladesh but became operational in the 1990s. Since then, there are now seven enlisted companies. So this sector is being influential for stock market in Bangladesh, but it is still a big challenge for these firms to cope with various internal handicaps like earning management quality. Moreover, the major beneficiary of this paper is the Bangladeshi cement industry, which is the 40th largest industry in the world. The country has been experiencing a huge portion of cement consumption for the last decade. But surprisingly, there is a dearth of research about the quality of financial information in the cement sector of Bangladesh. Therefore, this research study will contribute to fill in the gap and serves as the motivation of this research study.
This paper, hence, deals with two research questions:
RQ 1: Is there any relationship between quality of Financial Information and firm-specific characteristics?
RQ 2: Is the overall performance scenario good enough for this sector?
Quality of financial information is influenced by the firm specific characteristics. One of the major firm specific characteristics is the profitability of the firms. This study has been conducted in the context of the Cement companies of Bangladesh. Manipulation of financial information is mostly done through profitability. The study also found that information related to use of external financing is also misleading.
This paper has been designed with six sections. Apart from introduction, rest of the parts includes theoretical framework in section 2, literature review and hypothesis development in section 3, methodology in section 4, empirical results in section 5, and additional analysis, discussion and conclusion in the last section 6.
Two major theories (transaction cost theory and agency cost theory) are directly associated with the content of this paper. The paper involves assessing determinants of financial information quality. The theories are described below:
When internal control is weak, there is a need for transaction cost that is associated with strong system designing. However, a relationship exists between weak internal control and lower accrual quality which ultimately leads to poor disclosure quality of financial information (
Another important product of transaction cost theory is Accounting Information Systems (AIS). This is a set of tools to ensure certifiably better data which comprises the Financial Statements (
In financial based literature, agency theory is concerned with profit maximization and wealth maximization. But in broader sense, it is a relational fact. Owners (principal) and management (agent) are the only two key players in the context of this theory. In the study of
To decrease the extent of financial fraud, a number of measures were taken to improve principal-agent relationship. One strong step is to strengthen internal control (
3. Literature Review and Hypothesis Development
Cement industry is one of the most growing sectors in Bangladesh, but most of the companies of this sector disclose very little amount of information. In this study, quality of financial information has been analyzed. Outcome of the operational activities is expressed to the stakeholders of an organization through financial reporting which can also be considered as a mean of communication (
Auditors provide assurance on the company’s financial statements, and users of financial statements rely on the auditor’s report. Moreover, high quality financial reporting is essential because it will influence the decision of the capital providers and other stakeholders in making decision about investment, credit, and similar resource allocation enhancing overall market efficiency (
Several studies provide evidence on the distinctiveness of firms applying IFRS voluntarily. Al-Basteki (1995) demonstrates that audit firm and the line of business are explanatory variables that influence Bahrain firms of voluntary adoption of IFRS. It is very common that the quality of IFRS is higher than most domestic financial standards (Barth, Landsman, & Lang, 2008). It is also anticipated that financial quality would be higher after the adoption of IFRS, but in Bangladesh, the financial quality of cement sector is not up to mark.
Prior studies found that financial disclosures have been failing to provide reliable information, and as a result, the demand of quality of financial information is increased through structured governance (Brown & Caylor, 2006;
Reduced amount of corporate disclosure and transparency became a vital issue in Asian countries following the financial crisis of 1997-98. Rather, subsequent regulatory attempts to enlarge corporate disclosure in many Asian countries, concerns remain about not so strapping level of disclosure in the region.
In Bangladesh, public sector needs better financial quality to implement public financial management.
The following hypothesis are developed to find out the determinants of quality of financial information:
In many studies, firm size (FS) has been considered as proxy for profitability (
H1: There is an association between quality of financial information and firm size.
Quality of financial information can also be termed as financial reporting quality. Quality of financial information plays a very important role in investment decision or any other managerial decision (
H2: There is a negative relationship between financial quality and ROA.
Use of external financing is considered another determinant of earning quality or quality of financial information (
H3: Leverage or use of external financing has impact on quality of financial information.
Accrual quality is a good indicator of earning quality. Hence, there is a parallel relation between accrual quality and accounting earning quality (Chen, 2016;
H4: There is a positive relationship between financial information quality and accrual quality
The research paper is designed as an empirical study. Variables were calculated from the financial data of the annual reports. Beneish M-score was used to detect the quality of financial information (QFI).
4.1. Data collection and sample observation
The research study is developed in the context of the cement sector of Bangladesh. To collect financial data, annual reports were initially used of the seven listed cement companies of Bangladesh during the period of 2007 to 2015. But there were two reasons for which total observation set is incomplete as per initial planning. Firstly, during the research work, only a few firms published audited financial statements of 2016. Hence, firm year of 2016 is excluded. Secondly, annual reports of two of the firms were not available during research work. However, some financial data were collected from the database of Lanka Bangla Finance’s website. As a whole, there are seven firms and 63 firm years. Observation size is given below:
[Table 1:] Number of Observation
Number of Observation
In this study, pooled OLS (Ordinary Least Square) and panel methods were used to find the determinants of quality of financial information. The research model is presented below:
QFI = β0+β1FS+β2 ROA+β3LEV+β4AccQ+ė
Some additional analysis was conducted to check the robustness of the model. To resolve the problem of heteroskadasticity, the regression results are presented using OLS.
Table 2 shows the definition of the variables:
List of Variables
Overall equation for dependent variable calculation:
Dependent Variable
QFI = –4.84 + 0.920*DSRI + 0.528*GMI + 0.404*AQI + 0.892*SGI + 0.115*DEPI – 0.172*SGAI – 0.327*LVGI + 4.679*TATA
* Beneish M-score of measuring earning quality; Score less than -2.22 means Good earning quality; Score more than -2.22 means Bad earning quality.
From 70 observations, 58 observations were available. Table 3 presents the descriptive statistics. The descriptive result shows that the average mean value of the quality of financial information is 1.257, and standard deviation is 16.9844. In case of firm size, average natural logarithm of sales is 20.57 with SD of 2.49. Average firm size is close to the median value. The average mean value of the profitability is 5.7%, which indicates that the firms in the Cement sector of Bangladesh are getting 5.7% return from their total reported assets. Leverage shows 15.51% mean value that indicates firms are holding almost 16% debt in comparison with total asset. A high standard deviation exists in the accrual quality of the firms.
[Table 3:] Descriptive Statistics
Descriptive Statistics
Table 4 presents the correlation matrix which shows that quality of financial information is positively associated with firm size (0.083) and accrual quality (0.037) and negatively associated with profitability (-0.280) and leverage (-0.134).
Correlation Matrix
Table 5 presents the checking of multicollinearity test and the results show that the average mean VIF is 1.27, which is less than 10. It can be inferred that there is no multicolinearity problem in this research study.
[Table 5:] Checking of Multicollinearity Test
Checking of Multicollinearity Test
Table 6 shows the multivariate analysis of the quality of financial information. In this study, initially pooled OLS regression analysis (
[Table 6:] Regression Results of the Quality of Financial Information
Regression Results of the Quality of Financial Information
Table 7 presents the additional analysis, which considers the time dummy to check the robustness of the results. In this analysis, time dummy is controlled in the pooled OLS regression. The regression results show that the results are consistent with the main analysis. This result implies that profitability and leverage are the significant explanatory variables for determining the quality of financial information, but accrual quality and firm size have no significant association with the quality of financial information.
[Table 7:] Regression Results of Pooled analysis (with and without considering time dummy)
Regression Results of Pooled analysis (with and without considering time dummy)
This study finds that there is an association between profitability of the firms and the quality of financial information, which implies that profitability is a good indicator of quality of financial information in the context of Cement sector of Bangladesh. This finding is consistent with the study of Ahmed and Azim (2015). This study also finds that condition of overall performance is not up to the mark. This performance can be seen from two different perspectives: disclosure scenario and financial reporting. Low disclosure status communicates the lower performance in terms of quality financial information. Profitability status is very poor in the cement sector as a whole. Earnings are more volatile and, thus, profitability should be more focused to enhance the quality of financial performance without daunting the quality of disclosed financial information.
In short, this study finds that profitability and external financing are the two major explanatory variables in determining the quality of financial information. This study also finds that firm size and accrual quality don’t have any significant influence on quality of financial information. This research has some limitations such as limited sample size, unavailability of sufficient dataset, no affiliation with BIG 4 audit firm of the listed cement firms of Bangladesh. But this study provides some indications for future research such as considering the listed firms of other sectors of Bangladesh. Moreover, a cross country comparison can also be considered to check the variation of results in different country setting.