This paper examines the relationship between financial reporting quality and investment efficiency. It finds that higher financial reporting quality is associated with both lower over-investment and lower under-investment. Specifically, firms with higher financial reporting quality are less likely to deviate from predicted investment levels and show less sensitivity to macroeconomic conditions. These results suggest that financial reporting quality reduces frictions such as moral hazard and adverse selection that hinder efficient investment. The study uses three approaches to investigate these hypotheses: examining the association between financial reporting quality and investment for firms prone to over- or under-investment, modeling the expected level of investment based on firm-specific opportunities, and identifying settings where firms are more likely to over- or under-invest. The study also considers alternative governance mechanisms, such as institutional ownership, analyst coverage, and the market for corporate control, and finds that these mechanisms are not significantly associated with investment efficiency. The findings suggest that financial reporting quality is associated with higher investment efficiency, with stronger results for the Dechow and Dichev measure of financial reporting quality. The study also finds that financial reporting quality is negatively related to investment when aggregate investment is high and positively related when aggregate investment is low. The results are robust to alternative measures of financial reporting quality, including those based on accruals quality and readability of financial statements. The study contributes to the literature on the relationship between financial reporting quality and investment, showing that higher quality financial reporting is associated with more efficient investment.This paper examines the relationship between financial reporting quality and investment efficiency. It finds that higher financial reporting quality is associated with both lower over-investment and lower under-investment. Specifically, firms with higher financial reporting quality are less likely to deviate from predicted investment levels and show less sensitivity to macroeconomic conditions. These results suggest that financial reporting quality reduces frictions such as moral hazard and adverse selection that hinder efficient investment. The study uses three approaches to investigate these hypotheses: examining the association between financial reporting quality and investment for firms prone to over- or under-investment, modeling the expected level of investment based on firm-specific opportunities, and identifying settings where firms are more likely to over- or under-invest. The study also considers alternative governance mechanisms, such as institutional ownership, analyst coverage, and the market for corporate control, and finds that these mechanisms are not significantly associated with investment efficiency. The findings suggest that financial reporting quality is associated with higher investment efficiency, with stronger results for the Dechow and Dichev measure of financial reporting quality. The study also finds that financial reporting quality is negatively related to investment when aggregate investment is high and positively related when aggregate investment is low. The results are robust to alternative measures of financial reporting quality, including those based on accruals quality and readability of financial statements. The study contributes to the literature on the relationship between financial reporting quality and investment, showing that higher quality financial reporting is associated with more efficient investment.