This study examines how accounting quality relates to firm‐level capital investment efficiency. Our first hypothesis is that higher quality accounting enhances investment efficiency by reducing information asymmetry between managers and outside suppliers of capital. Our second hypothesis is that this effect should be stronger in economies where financing is largely provided through arm's‐length transactions compared with countries where creditors supply more capital. Our results are consistent with these hypotheses both across and within countries. They are robust to alternative econometric specifications, different measures of accounting quality and investment‐cash flow sensitivity, and numerous control variables.

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