The Role of Financial Statement Comparability and Product Diversification in the Internal Capital Allocation Efficiency

Objective: Comparability of financial statements can be considered as one of the dimensions of corporate governance because it reduces the value reduction caused by diversification in the company. In addition, empirical results show that comparability of financial statements can provide better benefits for companies that face more severe agency problems. As a result, comparability of financial statements can reduce agency problems for multi-sector companies, which are the root of internal capital inefficiency and control the decline in future values. Managers usually tend to allocate internal resources and capital based on the unit profitability. However, diversity in product offerings leads to changes in the internal capital allocation process. The aim of this paper is to examine the role of financial statement comparability and product diversification in the internal capital allocation efficiency.
Method: The purpose of this study is descriptive and based on the nature and method of correlation. Considering that this research can be used in the decision making process of investors, the type of applied research is considered. In this research, library method has been used to collect data and information. Then, for collecting the research data, compact discs, visual and statistical archives of the Tehran Stock Exchange, the official website of Tehran Stock Exchange and other related online databases have been used. In this study, in order to examine and analyze the hypotheses, data related to 120 companies listed on the Tehran Stock Exchange for the period 2016 to 2023 were extracted and a panel data regression model with fixed effects was used to test the research hypotheses.
Findings: The results of the study indicate that the comparability of financial statements leads to an increase in the internal capital allocation efficiency. Also, the results of the second hypothesis of the study indicate a significant relationship between product diversity and the internal capital allocation efficiency. The results of the third hypothesis indicate a significant effect of financial statement comparability on the relationship between product diversity and the internal capital allocation efficiency. Also, the results of the fourth hypothesis of the research indicate a significant relationship between information asymmetry and internal capital allocation efficiency. Finally, the results of the fifth hypothesis indicate an interactive effect of information asymmetry, financial statement comparability, and product diversity on internal capital allocation efficiency.
Conclusion: The financial statements comparability through the processing and communication of intra-organizational information provides qualitative frameworks of accounting information for capital market practitioners. Therefore, this strategy makes it possible to evaluate the success of investment projects. In other words, comparability, by increasing the accuracy of available information, increases the possibility of efficient internal capital allocation based on output and reduces the managers’ willingness to decrease the shareholders’ interest.
Keywords: Financial statement comparability, product diversification, internal capital allocation efficiency, information asymmetry