The Impact of Financial Repor ting Quality (FRQ) on Decision-Usefulness: A Case of Investors in Sri Lanka

Purpose: Financial Reporting Quality (FRQ), which reflects the quality of the information provided through a set of financial statements of an entity, along with the disclosures thereon is the main focus of this study. The financial crises and accounting scandals that happened recently diluted the trust of investors regarding financial information and it led to numerous criticisms of FRQ being developed. Hence, this study concentrates on two research objectives; i. develop an FRQ measurement model to measure the FRQ based on the Qualitative Characteristics (QCs) of financial information, as per the Conceptual Framework of International Accounting Standard Board (IASB) and ii. explores the contribution of the developed FRQ measurement model toward providing decision-useful information for investors in the Sri Lankan context. Design/methodology/approach: To collect data, a questionnaire survey was carried out and 397 questionnaires were selected. Partial Least Square Structural Modeling (PLS-SEM) was used to develop the FRQ measurement model. In evaluating the measurement model the Variance Inflation Factor (VIF), the significance of the outer weights, and the path coefficient results of QCs were used. The results show that the coefficients of all the QCs significantly contribute to the development of the FRQ measurement model and recognize a substantial influence of FRQ. Findings: The users of financial reports can use financial information presented in financial reports since the financial reports have been prepared based on the qualitative characteristics identified by the IASB and it gives useful information in making their investment decisions. Research limitations/implications: The investors who have accounting knowledge to some extent were chosen for data collection. Originality/value: This study focuses on developing an index based on QCs of financial information as per the Conceptual Framework of IASB and to measure FRQ and the its Decision-usefulness in terms of investors' perspective in Sri Lanka, and for which primary data obtained directly from investors has been used.