Financial Information Globalization and Foreign Investment Decisions

42 Pages Posted: 12 Aug 2009 Last revised: 7 Dec 2014

See all articles by Dan Amiram

Dan Amiram

Tel Aviv University - Coller School of Management

Date Written: August 1, 2012

Abstract

This paper investigates the association between the adoption of international accounting standards and foreign investment decisions. Prior research suggests that information asymmetries between local and foreign investors and behavioral biases caused by unfamiliarity of the foreign markets contribute to investors preferring to invest in their home markets. Because one of the goals of the adoption of international accounting standards is to establish a high quality, internationally familiar set of accounting standards, I predict that foreign investments will increase in countries that adopted International Financial Reporting Standards (IFRS) after the adoption and that this increase is driven by the familiarity of IFRS. I find that foreign equity portfolio investments (FPI) increase in countries that adopt IFRS. More importantly, I find that this relation is driven by foreign investors from countries that also use IFRS. Moreover, the effect of accounting familiarity is more pronounced when investor and investee countries share language, legal origin, culture, and region. I also find that countries with lower corruption and better investor protection experience larger increases in FPI after they adopt IFRS relative to other IFRS users. These findings are consistent with the hypothesis that familiar accounting information drives foreign investment decisions.

Keywords: Foreign portfolio investments, international accounting, IFRS, familiarity, information asymmetry, home bias, foreign bias, cross-border investments.

JEL Classification: M41, M47

Suggested Citation

Amiram, Dan, Financial Information Globalization and Foreign Investment Decisions (August 1, 2012). Journal of Intrernational Accounting Research,11 (2), 2012. Available at SSRN: https://ssrn.com/abstract=1446522 or http://dx.doi.org/10.2139/ssrn.1446522

Dan Amiram (Contact Author)

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

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