Cross-Border Investments in Private Firms: The Benefits of Comparability for Foreign Investors

Abstract

We examine whether the mandated convergence of local German GAAP with IFRS increases investment by foreign equity investors in German private firms. Exploiting a large-sample quasi-experimental setting, we document an average foreign ownership increase of 2 to 8 percent in firms affected by the accounting reform compared to our unaffected control firms. Based on our identification strategy, using both the unique setting and accounting system comparability (that is, the comparability of cash flows in the next period), we show that increased comparability can minimize challenges faced by investors in private firms. We also find that those investors more familiar with IFRS benefit more from the increased accounting comparability. Our findings are robust to different forms of matching procedures and a placebo test. We provide evidence for ongoing discussions on the costs of separate accounting standards for private firms. We show significant benefits when private firms’ accounting becomes more (and not less) comparable to that of public firms.

Keywords: accounting comparability, private firms, economic effects, cross-border investment

JEL Classification: G14, M40, M41, M48