When does the Adoption and Use of IFRS increase Foreign Investment?

Abstract

Extant research suggests that the use of IFRS provides firms an opportunity to reduce information asymmetry and make themselves more attractive to foreign investors. However, Daske et al., (2013) suggest that any benefits of IFRS adoption will accrue only to firms with incentives to provide transparent financial reporting. We thus predict that foreign ownership will be higher in IFRS firms with strong reporting incentives than in IFRS firms with weaker reporting incentives. Using a sample of over 54,000 firm-years from 72 countries during the period 2001 to 2011, we find evidence supporting this hypothesis. Further, a one quartile increase in transparency is associated with a 0.74 % higher level of foreign ownership, which is economically meaningful compared to a mean level of foreign ownership of 8.14 % across our sample. Additional tests show that our results are driven by countries with weak investor protection and by investments made by institutional investors