Accounting Standards and International Portfolio Holdings
Harvard Business School
Aida Sijamic Wahid
University of Toronto - Rotman School of Management
June 30, 2010
Do differences in countries’ accounting standards affect global investment decisions? We explore this question by examining how accounting distance (i.e., the difference in the accounting standards used in the investor’s and the investee’s country) affects the asset allocation decisions of global mutual funds. We find that funds tend to underweight investees with greater accounting distance. Using the mandatory adoption of International Financial Reporting Standards (IFRS) as an event that changed the accounting standards of various country-pairs, we examine how two sources of changes in accounting distance – i) from IFRS adoption in the investee’s country and ii) from IFRS adoption in the the investor’s country – affect global portfolio allocation decisions. We find that the tendency to underinvest in investees with greater accounting distance significantly weakens when accounting distance is reduced either from a investee’s IFRS adoption or from IFRS adoption in the investor’s country. The latter finding holds despite the fact that IFRS adoption in the investor’s country had no impact on the accounting standards under which the investees presents its financial information; the only change is to the investor’s familiarity with these standards. This suggests that differences in accounting standards affect investor demand by imposing a greater information processing cost on those who are less familiar with the reporting standards.
Keywords: IFRS, Home bias, Harmonization, International CAPM
JEL Classification: M44, M47working papers series
Date posted: July 7, 2009 ; Last revised: August 21, 2013
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