Did China's Adoption of IFRS Attract More Foreign Institutional Investment?

54 Pages Posted: 19 Apr 2014 Last revised: 28 Apr 2014

See all articles by Mark L. DeFond

Mark L. DeFond

University of Southern California - Leventhal School of Accounting; European Corporate Governance Institute (ECGI)

Xinzi Gao

Sun Yat-Sen University (SYSU)

Oliver Zhen Li

National University of Singapore (NUS)

Lijun Xia

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Date Written: April 18, 2014

Abstract

We examine the impact of China’s IFRS adoption on foreign institutional investment. We find that foreign institutional investment does not increase after China’s IFRS adoption, and some evidence that it actually declines, particularly among firms with weaker incentives to credibly implement IFRS, or with greater ability to manipulate IFRS’s fair value provisions. We also find that the association between earnings and returns generally declines after IFRS adoption, consistent with reduced earnings quality. In addition, we find that foreign institutional investors’ returns decline after China’s IFRS adoption. Finally, the decline in foreign institutional investment is greater among investors from countries with weak institutions that have also adopted IFRS. Taken together, our evidence suggests that China’s weak institutional infrastructure impairs IFRS’s ability to improve financial reporting quality and increase foreign institutional investment.

Keywords: International financial reporting standards; institutional investment; China; transitional economies

Suggested Citation

DeFond, Mark and Gao, Xinzi and Li, Oliver Zhen and Xia, Lijun, Did China's Adoption of IFRS Attract More Foreign Institutional Investment? (April 18, 2014). Marshall School of Business Working Paper No. ACC 01.14, Available at SSRN: https://ssrn.com/abstract=2426484 or http://dx.doi.org/10.2139/ssrn.2426484

Mark DeFond (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Accounting Building, Room 206
Los Angeles, CA 90089-0441
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213-747-2815 (Fax)

European Corporate Governance Institute (ECGI) ( email )

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1000 Brussels
Belgium

Xinzi Gao

Sun Yat-Sen University (SYSU) ( email )

135, Xingang Xi Road
Guangzhou, Guangdong 510275
China

Oliver Zhen Li

National University of Singapore (NUS) ( email )

1E Kent Ridge Road
NUHS Tower Block Level 7
Singapore, 119228
Singapore

Lijun Xia

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

Room 723, Antai Building, 1954 Huashan Rd.
Shanghai Jiao Tong University
Shanghai, Shanghai 200030
China

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