Information Frictions and Investor Home Bias: A Perspective on the Effect of Global IFRS Adoption on the Extent of Equity Home Bias

26 Pages Posted: 2 Jun 2008

See all articles by Messod D. Beneish

Messod D. Beneish

Indiana University - Kelley School of Business - Department of Accounting

Teri Lombardi Yohn

Emory University Goizueta Business School

Date Written: May 23, 2008

Abstract

This paper provides a perspective on the effect of IFRS adoption on the tendency of investors to under-invest in foreign equities. We consider explanations for the home equity bias described in prior research and discuss research relevant to the informational consequences of global adoption of IFRS. Specifically, we evaluate whether IFRS adoption reduces information processing costs or decreases investor uncertainty about either the quality of financial reporting or the distribution of future cash flows. We predict that the effect of any reduction in information processing costs from the adoption of IFRS is likely to be small relative to the effects of other determinants of home bias such as the strength of investor protection mechanisms in foreign countries, behavioral biases toward familiar equities, and informational advantages related to geographical proximity. We conclude that global IFRS adoption is unlikely to reduce home bias and propose avenues for future research.

Keywords: international accounting standards, home bias

JEL Classification: G15, M41, M44, M47, G38

Suggested Citation

Beneish, Messod Daniel and Yohn, Teri Lombardi, Information Frictions and Investor Home Bias: A Perspective on the Effect of Global IFRS Adoption on the Extent of Equity Home Bias (May 23, 2008). Available at SSRN: https://ssrn.com/abstract=1139827 or http://dx.doi.org/10.2139/ssrn.1139827

Messod Daniel Beneish (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2628 (Phone)
812-855-4985 (Fax)

Teri Lombardi Yohn

Emory University Goizueta Business School ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

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