Abstract

This research investigates the impact of free cash flow on the relationship between the quality of financial reporting and over-investment in companies listed on Tokyo stock exchange. The theoretical foundations of this research are based on the theory of representation and the theory of information economics; it is rooted in issues such as conflict of interest and information asymmetry. The main issue is a kind of inadequacy of investment under the heading of over-investment. The results indicate that the higher the quality of corporate financial reporting is, the lower is the chances of over-investment, and high free cash flows lead to an increase in investment inefficiency. The research hypotheses have been tested through multiple regression and the control of the determinants of over investment through panel data. The statistical population of the research is all companies accepted in Tehran Stock Exchange between 2012 and 2016. Finally, 105 companies whose information were available were analyzed and selected as the research sample. The results of the research showed that there is a negative and significant relationship between financial reporting quality and over-investment. Also, the results showed that free cash flow had a negative and significant effect on the relationship between the quality of financial reporting and investment.