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

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