Previous studies have shown that a weak internal control may lead to increased moral
hazard and adverse selection and may in turn lead to increased investment inefficiency. This study examine investment efficiency of firms listed on the Indonesian Stock Exchange after the release of Bapepam-LK regulation on internal control in 2003. Regression analysis showed that after the issuance of the regulation on internal control, financial reporting quality is negatively related to investment inefficiency. However, a similar patternt is not detected in under investment gourp of sample. In regard to financial resources constraints, the level of under (over) investment between financialy constrained and unconstrained firms are of no difference. Taken as a whole, the findings support the important role of strong internal control system in reducing investment inefficiency that stems from over investment. In addition, firms’financial constraints do not affect investment inefficiency.