The Effect of Financial Reporting Quality on Investment Decision Effectiveness: The Moderating Role of Investor Financial Literacy

Abstract

This paper aims to investigate the impact of financial reporting quality on the effectiveness of investment decision and to analyze the moderating role of financial literacy among investors between financial reporting quality and effectiveness of investment decision making. The study is based on Decision Usefulness Theory which posits that quality financial reporting will positively contribute to better investment decisions through reduction of information asymmetry, transparency improvement, and provision of reliable, decision-useful information. It also posits that financially educated investors understand how to interpret accounting information and how to use these to make effective investment decisions. The research design in this study was quantitative and deductive with a total of 239 individual investors were selected as the samples using purposive sampling. SPSS was used to analyze the data, including regression analysis and moderation analysis. The results show financial literacy directly enhances effective investment decisions as well as the effect of financial reporting quality being significant and positive on investment decisions' effectiveness. Furthermore, there was significant positive impact of financial literacy on the relationship linking financial reporting quality with the effectiveness of investment decisions as proxied by the worth gain ratio, suggesting that better investment decision effectiveness is more likely to come from high-quality financial reporting and that this relationship is enhanced by financial literacy. This study contributes to Decision Usefulness Theory by adding investor capability as well as accounting information quality, and it adds to literature on Behavioral Finance by promoting financial literacy not only as a direct determinant, but also as a moderating effect. The research has practical implications for regulators and the corporate and financial sectors looking to enhance reporting transparency, investor competence and, overall, market efficiency, and for educators striving to design programs aware of such developments. The findings validate all the hypotheses and suggest improving the disclosure quality in addition to investor education programmes for rational and informed investment decision. Globally capital markets developing & enhancing stakeholder confidence.