Moderating role of Chief Executive Officer optimism on the relationship between earnings quality and investment efficiency of firms listed in the Nairobi Securities Exchange

Abstract

This paper aims at examining whether earnings quality affects investment efficiency of firms listed in the Nairobi Securities Exchange(NSE).In the current century, investors are concerned at how the company’s investment activities are managed in the most efficient way so as to achieve the goal of maximizing their value. Having efficient investment is also an indicator for firms’ survival which also guarantees further development of firms. Empirical literature establishes mixed relationship of earnings quality and investment efficiency, a gap that puzzles in making informed investment decisions. Earnings quality in this study has been grounded on the finance theories of Neo-classical theory of investment, agency theory and information asymmetry theory. The Moderating role of chief executive officer has been supported by the optimism theory. These contemporary theories have been tested mostly to advocate possible links between earnings quality optimism of the CEO and the cost of capital charged by investors. This study uses a sample of 28 non-financial firms listed in Nairobi Securities Exchange and data for the period 2010-2020. Data is analyzed through random effect regression analysis. The study finds that earnings quality (β =0.138, ρ<0.05) positively and significantly influences investment efficiency of firms listed in NSE.Equally, CEO optimism was found to have negative but significant effect on the relationship between earnings quality and investment efficiency (β =-0.96, ρ<0.05).Whenfirms managethe quality of their earnings they enhance investment efficiency. In other words,having good return of equity is a good measure of internal rate of returns of the investment portfolio. The findings of this study help investment managers to keenly annuitize the intrinsic value of the firm as a way of enhancing investment efficiency.This is to note that managerial optimism needs to be controlled to avoid over investment given the good quality of earnings management.