beneish ifrs adoption cross-border investments

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Electronic copy available at: http://ssrn.com/abstract=1403451 IFRS Adoption and Cross-Border Investment in Equity and Debt Markets Messod D. Beneish Brian P. Miller Teri Lombardi Yohn [email protected] [email protected] [email protected] (812) 855-2628 (812) 855-2606 (812) 855-0430 ABSTRACT We examine changes in foreign investment flows surrounding the adoption of International Financial Reporting Standards (IFRS) to assess whether adopting countries attract greater foreign investment. Our sample consists of countries that mandated IFRS adoption (primarily from the European Union) and non-adopting control countries with large market capitalizations. We find that adopting IFRS has no discernable effect on adopting countries’ ability to attract foreign equity investment. However, we find that adopting countries attract significantly more debt investment than non-adopting countries. Our results are robust to controlling for contemporaneous changes in countries’ investor protection mechanisms as well as various determinants of cross-border investment. Our evidence related to equity markets suggests that the IFRS adoption benefits to individual companies documented in prior research likely derive from domestic investors. In contrast, for debt markets, companies also obtain benefits through increased foreign investment. This is pertinent to regulators considering the implications of IFRS adoption. Key Words: IFRS adoption, cross-border investment, debt market, equity market November 15, 2010 We thank Gian Maria Milesi-Ferretti for his help with interpreting the country foreign asset and liability data from the International Monetary Fund, Cam Harvey and Bjorn Jorgensen for helpful comments, workshop participants at Colorado State, The European Accounting Association Annual Meeting, The Pennsylvania State University Accounting Research Conference, the University of Alberta Accounting Research Conference, and Christy Deykes, Alex Hilt, Gina Rogers, Patrick Vo, and Brendan Yohn for research assistance.

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Page 1: Beneish IFRS Adoption Cross-Border Investments

Electronic copy available at: http://ssrn.com/abstract=1403451

  

IFRS Adoption and Cross-Border Investment in Equity and Debt Markets

Messod D. Beneish Brian P. Miller Teri Lombardi Yohn          [email protected] [email protected] [email protected]

(812) 855-2628 (812) 855-2606 (812) 855-0430

ABSTRACT

We examine changes in foreign investment flows surrounding the adoption of International Financial Reporting Standards (IFRS) to assess whether adopting countries attract greater foreign investment. Our sample consists of countries that mandated IFRS adoption (primarily from the European Union) and non-adopting control countries with large market capitalizations. We find that adopting IFRS has no discernable effect on adopting countries’ ability to attract foreign equity investment. However, we find that adopting countries attract significantly more debt investment than non-adopting countries. Our results are robust to controlling for contemporaneous changes in countries’ investor protection mechanisms as well as various determinants of cross-border investment. Our evidence related to equity markets suggests that the IFRS adoption benefits to individual companies documented in prior research likely derive from domestic investors. In contrast, for debt markets, companies also obtain benefits through increased foreign investment. This is pertinent to regulators considering the implications of IFRS adoption. Key Words: IFRS adoption, cross-border investment, debt market, equity market

November 15, 2010

We thank Gian Maria Milesi-Ferretti for his help with interpreting the country foreign asset and liability data from the International Monetary Fund, Cam Harvey and Bjorn Jorgensen for helpful comments, workshop participants at Colorado State, The European Accounting Association Annual Meeting, The Pennsylvania State University Accounting Research Conference, the University of Alberta Accounting Research Conference, and Christy Deykes, Alex Hilt, Gina Rogers, Patrick Vo, and Brendan Yohn for research assistance.

Page 2: Beneish IFRS Adoption Cross-Border Investments

Electronic copy available at: http://ssrn.com/abstract=1403451

  

IFRS Adoption and Cross-Border Investment in Equity and Debt Markets

ABSTRACT

We examine changes in foreign investment flows surrounding the adoption of International Financial Reporting Standards (IFRS) to assess whether adopting countries attract greater foreign investment. Our sample consists of countries that mandated IFRS adoption (primarily from the European Union) and non-adopting control countries with large market capitalizations. We find that adopting IFRS has no discernable effect on adopting countries’ ability to attract foreign equity investment. However, we find that adopting countries attract significantly more debt investment than non-adopting countries. Our results are robust to controlling for contemporaneous changes in countries’ investor protection mechanisms as well as various determinants of cross-border investment. Our evidence related to equity markets suggests that the IFRS adoption benefits to individual companies documented in prior research likely derive from domestic investors. In contrast, for debt markets, companies also obtain benefits through increased foreign investment. This is pertinent to regulators considering the implications of IFRS adoption. Key Words: IFRS adoption, cross-border investment, debt market, equity market

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IFRS Adoption and Cross-Border Investment in Equity and Debt Markets

I. INTRODUCTION

Proponents of International Financial Reporting Standards (IFRS) frequently argue that

IFRS adoption will increase international investment flows, improve resource allocation, and

enhance capital market efficiency (McCreevy 2005; SEC 2008; White 2008; KPMG 2007). The

widespread 2005 adoption of IFRS provides an opportunity to examine whether this regulatory

change achieves its purported benefits. This study empirically evaluates whether widespread

adoption of IFRS leads to an increase in foreign investment into the adopting countries.

We compare changes in foreign equity and debt investment from 2003 to 2007 across

adopting countries and control countries. Our experimental sample (adopters) includes all

countries that adopted IFRS in 2005 for which foreign debt and equity investment data are

available. This includes 13 adopting countries that were part of the European Union (EU) as well

as four non-EU countries that mandated IFRS adoption in 2005. To ensure our results are not

driven by global increases in foreign investment, we also select a control sample of 12 countries

based on country market capitalization. Despite representing only 15 percent of the 194 countries

worldwide, our sample countries account for over 90 percent of worldwide foreign debt and

equity investment.

A number of country-specific and worldwide contemporaneous effects likely contribute

to changes in foreign investment between 2003 and 2007 in addition to mandated IFRS adoption.

Consequently, our analyses control for the change in the country’s gross domestic product, the

change in the country’s currency exchange rate, the percentage of companies in the country that

voluntarily adopted IFRS prior to the mandatory adoption, and the change in the country’s

governance characteristics. We supplement our aggregate analyses at the country level by

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examining changes in foreign investment at the country-pair level. We follow Lane and Milesi-

Ferretti (2008) in controlling for a number of determinants of cross-border investment including

bilateral trade, distance, the existence of tax treaties, whether the countries share a common

language and have similar legal origin, as well as correlations in stock returns and growth

between the two countries.

We find that adoption of IFRS has no discernable effect on adopting countries’ ability to

attract foreign equity investment. In contrast, we find that IFRS adoption is associated with a

significant increase in foreign debt investment. By 2007 adopting countries attract on average

$337 billion more debt investment than non-adopting countries, an abnormal increase of 17.7

percent relative to 2003.1 We also find that the increase in foreign debt investment is more

pronounced for countries with weaker governance/investor protection environments. Finally, we

find that the increase in foreign debt investment comes from adopting countries and non-

adopting countries alike. This suggests that greater comparability (for investors from adopting

countries only) does not attract additional foreign debt investment over that associated with

improved financial reporting quality (for investors from both adopting and non-adopting

countries). Our findings are robust to controlling for other determinants of investment flows and

contemporaneous changes in country governance, and to whether we analyze countries or

country-pairs.

Our study is one of the first in the accounting literature to examine the effect of changing

accounting standards on investment flows at the macroeconomic level. It contributes to a

growing body of research that documents various benefits to individual companies from adopting

IFRS, by providing “evidence on the important macro-economic outcomes of changes to

                                                            1 IFRS adopters attract on average $970 billion more foreign debt investment in 2007 as compared to 2003 levels

whereas control countries attract on average $633 billion more foreign debt investment in 2007. 

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mandated financial reporting rules” (Leuz and Wysocki 2008, 65). In particular, our cross-

country analysis helps determine whether the benefits documented in prior work at the company-

level derive from domestic investors or from foreign investors. Our findings suggest that benefits

of IFRS adoption accruing to individual companies in equity markets (Prather-Kinsey et al.

2008; Li 2010) are more likely to derive from investors within the country in which the company

is domiciled. This is consistent with research suggesting that, for equity investment decisions,

non-financial statement factors, such as the informational advantage associated with geographic

proximity, are of greater importance than information processing costs or the quality of financial

reporting (Coval and Moskowitz 1999, 2001; Malloy 2005; Bae, et al. 2008). In contrast, our

findings suggest that at least part of the benefits accruing to companies in debt markets (Kim, et

al. 2007; Florou and Kosi 2009) derive from increased investment from foreign investors.

This is pertinent to regulators as they consider the implications of IFRS adoption.

The remainder of the paper is organized as follows: Section 2 describes prior research

and develops the hypotheses, Section 3 describes the data and variables, Section 4 describes the

results, and Section 5 provides a summary and conclusions.

II. BACKGROUND AND THEOREOTICAL FRAMEWORK

Prior Research We examine whether countries that mandatorily adopt IFRS attract more foreign

investment into their equity and debt markets. Our examination is linked to a rich literature on

the effect of IFRS adoption on individual companies. This body of research suggests that IFRS is

a set of high quality accounting standards (Leuz 2003; Bartov, et al. 2005; Armstrong, et al.

2010); that IFRS adoption is associated with an improved financial reporting environment,

primarily for companies that had previously voluntarily adopted IFRS (Daske, et al. 2008;

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Horton, et al. 2008; Christenson, et al. 2008); and that mandated adoption is associated with

greater value relevance and information content of financial statements, a reduced cost of equity

capital (Prather-Kinsey et al. 2008; Li 2010), and increased foreign institutional equity

ownership (Florou and Pope 2009). These studies suggest that there are benefits to individual

companies from the voluntary and mandatory adoption of IFRS.

If these company-level benefits derive from foreign investors, IFRS adoption is likely to

be associated with positive outcomes such as greater cross-border investment and more efficient

international capital allocation. However, if the benefits derive primarily from investors within

the country in which the company is domiciled, the macro-economic effects of IFRS adoption

are an open question. This is the perspective of our paper and of two recent studies (Shima and

Gordon 2009; Yu 2009) that investigate the effects of IFRS adoption on U.S. investor allocation

choices and on foreign mutual fund holdings, respectively. Our examination of changes in cross-

border investment has the potential to inform regulators who are considering or reflecting on the

adoption of IFRS.2

Hypotheses

Given that IFRS adoption is an informational change, it could reduce information

frictions faced by investors into foreign markets. Beneish and Yohn (2008) distinguish three

types of information costs faced by foreign equity investors: (1) information processing costs, (2)

uncertainty about the quality of financial reporting, and (3) uncertainty about the distribution of

future cash flows.

                                                            2The SEC (2008, 13) states that “capital formation and investor understanding would be enhanced if the world’s major capital markets all operated under a single set of high quality accounting standards.” European Commissioner McCreevy (2005) suggests that widespread adoption of IFRS “should lead to more efficient capital allocation and greater cross-border investment, thereby promoting growth and employment in Europe.”  

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Research suggests that difficulty in interpreting financial statements compiled using

different accounting standards can act as an impediment to foreign investment and that

widespread adoption of IFRS could lead to greater comparability of financial statements across

countries (Gehrig 1993; Ball 2006). Greater comparability could decrease foreign investors’

processing costs or increase familiarity and potentially increase cross-border investment.

Evidence consistent with this notion is provided by Covrig, et al. (2007) who show that foreign

mutual fund ownership is higher among companies using IAS versus local standards, and

Bradshaw, et al. (2004) who show that U.S. institutional investment is greater in foreign

companies whose accounting methods conform more closely to U.S. GAAP. On the other hand,

Lang, et al. (2010) find that while mandatory adoption of IFRS increases earnings co-movement

among adopting companies, it decreases accounting comparability, where accounting

comparability is defined as the manner in which earnings map into returns.

Although the findings in prior research are mixed on whether financial statement

comparability is enhanced, they suggest that global IFRS adoption has the potential to reduce

information processing costs and increase investors’ perceived competence in investing in

foreign stocks. If foreign investment is at least partially hindered by investors’ inability to

interpret and compare financial statements of companies in other countries, adoption of IFRS

could provide companies with an expanded set of potential investors, leading to greater foreign

investment into the country.

Information costs related to foreign investment can also result from investors facing

uncertainty about the quality of foreign financial reporting. Leuz, et al. (2009) find that poor

disclosure and weak governance hinder foreign investment, suggesting that information

asymmetry and monitoring costs faced by foreign investors influence a country’s attractiveness

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to foreign investment. Prior research has shown that adopting IFRS increases the quality of

accounting standards for most countries.3 This has the potential to reduce foreign investors’

concerns over information asymmetries and monitoring, and result in greater foreign investment.

Finally, foreign investors may also face uncertainty about the distribution of future cash

flows. These information costs reflect the precision of both the financial and nonfinancial

information for forecasting future cash flows. Research has shown a domestic geographic

proximity investment bias where investors prefer to invest in companies that are geographically

closer because they are likely to have more precise information as a result of greater access and

more frequent interaction. To the extent that local investors’ information advantage stems from

frequent access provided by geographical proximity to the company’s operation (Coval and

Moskowitz 1999, 2001; Malloy 2005; Bae, et al. 2008) rather than the precision of the financial

statement information, then future cash flow uncertainty may not be affected by IFRS adoption.

However, to the extent that the uncertainty of the distribution of cash flows is associated with the

precision of the financial information, IFRS adoption may decrease the information disadvantage

faced by foreign investors relative to domestic investors, and, therefore, lead to greater foreign

investment.

Given the potential effects of IFRS adoption on the information frictions faced by foreign

investors, we propose that mandatory adoption of IFRS is associated with increased equity

investment, and present our first hypothesis (in alternative form):

                                                            3 Research has suggested that the adoption of IFRS represents a restriction of accounting method choices and an improvement in financial reporting disclosure over most local accounting standards (Ashbaugh and Pincus 2001). U.S. GAAP has often been the benchmark by which other country’s standards are measured. Prior research finds no significant difference in information asymmetry (Leuz 2003) or value relevance (Bartov, et al. 2005) between companies using IAS and companies using U.S. GAAP within a market. In addition, research finds lower information asymmetry (Leuz and Verrecchia 2000) and higher value relevance (Bartov, et al. 2005) for companies using IAS compared to companies using local GAAP.

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H1: IFRS adoption is associated with an increase in foreign equity investment into the adopting country.

The effect of IFRS adoption on attracting foreign investment is also likely to affect

foreign investment into the debt markets. There is evidence that financial statements are often

used to enforce monitoring and bonding contracts in order to mitigate agency problems

associated with debt (Jensen and Meckling 1976; Smith and Warner 1979).4

Prior work shows that IFRS earnings are timelier and less managed than earnings based

on local accounting standards (Barth, et al. 2008), suggesting that IFRS earnings are more

effective for contracting (Watts 2003). The notion that IFRS leads to better contracting is also

consistent with the findings that the sensitivity of credit ratings to accounting default factors

increases (Wu and Zhang 2009) and that earnings play a greater role in company internal

performance evaluations (Wu and Zhang 2008) after the voluntary adoption of IFRS. Recent

research also provides evidence suggesting that IFRS represents an improvement in disclosure

and monitoring: voluntary IFRS adopters pay lower rates on private loans, obtain more favorable

loan terms, and attract more foreign lenders (Kim, et al. 2007), and companies are more likely to

issue public bonds after mandatory IFRS adoption (Florou and Kosi 2009).

Given these arguments we propose that mandatory adoption of IFRS is associated with

increased debt investment, and present our second hypothesis (in alternative form):

H2: IFRS adoption is associated with an increase in foreign debt investment into adopting countries.

                                                            4 Jensen and Meckling (1976) argue that financial reporting is crucial in debt markets for mitigating agency problems. The authors show that in the absence of monitoring or bonding contracts, an owner-manager can increase his wealth at the expense of debt holders by first selling debt with the loose promise to invest in a project with a low return variance and by then investing in a project with the same systematic risk but a higher return variance. However, Jensen and Meckling (1976) go on to argue that the debt holders realize that the owner-manager will do so and they will price the debt accordingly. 

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III. VARIABLE DEFINITIONS AND DESCRIPTIVE STATISTICS

We start our sample selection by identifying all the countries with available data that

adopted IFRS in 2005. We note that all but four of the adopting countries are from the EU. We

report the results for the EU adopting countries separately from the results for the total sample of

adopting countries, because including only EU countries allows us to control for a potential self-

selection bias with respect to a country’s choice to mandatorily adopt IFRS and the country’s

expected growth in foreign investment into its markets. Given that IFRS adoption was a long

decision-making process that ultimately culminated in an EU-level (not country-level) decision,

the examination of the effect of IFRS adoption on foreign investment into the EU adopting

countries is not likely to be driven by a self-selection bias.5

After identifying the adopting countries, we eliminate the countries that joined the EU

after 2003, because we cannot disentangle the effects of IFRS adoption from other effects

associated with joining the EU. We also eliminate Ireland and Luxembourg because the amount

of reported foreign investment is greater than the reported market capitalization of the country.6

After these eliminations, we are left with 13 EU adopting countries and four non-EU adopting

countries in our sample.

In an attempt to rule out the possibility that any effects are due to global economic

impacts and not IFRS adoption, we also collect a sample of control countries based on the

countries’ 2003 market capitalizations in U.S. dollars. The equity market capitalizations are

obtained from Standard & Poor’s Global Stock Markets Factbook - 2008. The debt market                                                             5 Consistent with the notion that self-selection bias is unlikely to be driving the results in this paper, Rammana and Sletten (2009) find no evidence that expected changes in investment and trade are associated with a country’s choice to adopt IFRS.  6 In 2003, the amount or foreign equity investment in Ireland and Luxembourg equaled 189 percent and 1,700 percent of the country’s equity market capitalization. By comparison, the corresponding figures for Germany and the U.S were 30 percent and 9 percent. These high percentages likely stem from Ireland’s tax strategies that are designed to attract foreign investment, and from Luxembourg being an international banking center. Dropping these two countries is consistent with prior research (Sorensen, et al. 2007). 

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capitalizations are calculated as the outstanding domestic debt from the Bank for International

Settlements (BIS) 2004 Quarterly Reviews plus the foreign debt investment obtained from Lane

and Milesi-Ferretti (2007). We use country size to identify control countries because there is

evidence that size is an important determinant of both goods trade and investment flows across

countries (e.g., see Portes and Rey (2005)). Further, as EU adopters are typically large, selecting

large control countries makes it more likely that countries have similarly developed institutional

and governance characteristics. This is important if the effects of IFRS adoption depend on the

extent of investor protection (e.g., Ball, et al.2003; Leuz, et al. 2003; Bushman and Piotroski

2006; Lang, et al. 2006).

To select control countries, we begin by identifying Austria as the adopting country with

the smallest market capitalization in 2003 ($55 billion). We then identify non-adopting countries

with equity market capitalizations greater than $55 billion. Because we analyze both equity and

debt investment flows, we eliminate seven countries that lack the necessary data for debt

calculations (Chile, Indonesia, Israel, Kuwait, Russia, Saudi Arabia, and Taiwan).7 After these

screens, we are left with 12 non-adopting countries that have both debt and equity data available.

Despite the fact that our sample contains at most 29 countries of the 194 countries worldwide,

we find that our sample captures over 90 percent of foreign investment worldwide.8 In 2003,

worldwide foreign equity investment totaled $6.7 trillion. Figure 1 (A) shows that the 17

adopters represent 45 percent and the 12 control countries represent another 36.3 percent of the

total foreign equity investment. These 29 countries represent over 80 percent of the world’s

foreign investment total, and if we consider the nine countries we dropped as a result of missing

                                                            7 However, as data for their equity markets are available, we also conduct all of our equity analyses including these seven control countries and find quantitatively similar results. 8 These calculations are based on Coordinated Portfolio Investment Survey (CPIS) data from obtained from the IMF. Our calculations exclude investment flows classified by CPIS as Other Countries (Confidential Data), Other Countries (Unallocated), International Organizations, and Cayman Islands. 

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data, our sample countries initially represent 95 percent of foreign equity investment worldwide

with available data.9

Figure 1 (B) shows a similar pattern for worldwide foreign debt investment. In 2003,

worldwide foreign debt investment totaled $10.9 trillion. Figure 1 (B) shows that the 17 adopters

represent 59.5 percent and the 12 control countries another 32.7 percent of total foreign debt

investment. Thus, the 29 countries represent over 90 percent of the world total, and considering

the nine countries we drop as a result of missing data, our sample countries represent 96 percent

of foreign debt investment worldwide with available data.

Further, in Figures 2 (A) and (B) we report the percentages for the change in equity and

debt inflows from 2003 and 2007. Foreign equity and debt investments increased by $9.45 and

$9.02 trillion respectively: all but 7.9 percent and 6.6 percent of the increases in equity and debt

flows, respectively, are captured by our sample. In summary, although relatively small in

number, our sample captures approximately 95 percent of worldwide trans-national debt and

equity investment in 2003, and about 93 percent of the change in investment flows worldwide

with available data.

Table 1 presents the countries included in the analysis along with their respective equity

and debt market capitalizations as reported in 2003. With respect to equity markets, the United

Kingdom (Austria) has the highest (lowest) market capitalization of $2,460 billion ($55 billion)

in the adopting sample and the United States (Thailand) have the highest (lowest) market

capitalization of $14,266 ($119) in the control sample. With respect to the debt markets, the

United Kingdom (South Africa) has the highest (lowest) capitalization of $6,091 ($112) in the

                                                            9 We focus on 2005 because it is the year that countries with relatively large capitalizations adopted IFRS. We note that 33 small countries (representing 0.62 and 0.39 percent of worldwide equity and debt investment, respectively) adopted IFRS prior to 2005. However, data are not available for 25 of these countries and the impact of the remaining eight countries on worldwide equity and debt investment is immaterial from a global foreign investment perspective.

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adopting sample and the United States (Thailand) has the highest (lowest) capitalization of

$23,939 ($103) in the control sample. The mean (median) capitalization for adopting countries is

$551 ($489) billion for the equity market and $1,645 ($671) billion for the debt market. The

mean (median) capitalization for the control countries is $1,743 ($304) billion for the equity

market and $3,127 ($420) billion for the debt market. The bottom Panel of Table 1 provides

similar descriptive evidence for the limited sample of EU adopters.

The United States market dwarfs the other markets in the control country sample.

Excluding the United States from the sample, the mean (median) capitalization for the control

countries drops to $605 ($279) billion for the equity market and $1,235 ($320) billion for the

debt market. Because of the large impact of the United States on the average, we also estimate all

the analyses excluding the United States and find that the results (untabulated) are quantitatively

similar.

[PLEASE PLACE TABLE 1 HERE]

IV. RESULTS Attracting Foreign Investment: Univariate Tests

We examine whether there is a significant increase in foreign investment into adopting

countries from 2003 to 2007 relative to control countries. We use 2003 as the pre-period in the

test for changes in cross-border investment because it occurs both after the adoption of the Euro

in 2002 and prior to the adoption of IFRS in 2005. Examining the change from 2003 to 2007

allows us to isolate the market effect of IFRS adoption relative to other changes that occurred in

the EU.

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Table 2 provides univariate statistics on the foreign investment for each year from 2003

to 2007.10 In Panel A, we compare foreign equity investment for all IFRS adopters, EU-only

IFRS adopters, and control countries. We begin by examining the aggregate investment flows

relative to country market capitalization. This analysis is akin to a value-weighted analysis is

which we track foreign investment and market capitalization in aggregate for adopters and non-

adopters each year. For all adopters, the mean equity held by foreigners relative to the mean total

equity market capitalization increases each year from 2003 (36.0 percent) to 2007 (38.2 percent).

The average increase is thus 2.2 percent, and we observe a similar this pattern of change when

we consider EU-only adopters (3.0 percent), as well as control countries (3.2 percent),

suggesting no apparent differential increase for adopters and non-adopters.

We obtain similar results in the by-country analysis where, akin to an equally-weighted

analysis, we track the percentage of each country’s market capitalization that reflects foreign

investment in each year.11 We find that adopting countries experience greater foreign

participation in each year relative to the control countries in equity markets. For example, in

2003, adopting country foreign participation in equity markets was an average of 35 percent

                                                            10 In Table 2, we use the foreign equity (debt) liabilities from the database constructed and adjusted by Lane and Milesi-Ferretti (2007) to capture the foreign investment into adopting and control countries; the stock market capitalization data are from the Standard and Poor’s Global Stock Markets Factbook – 2008; and the domestic debt market capitalizations are from the Bank for International Settlements (BIS) plus the foreign debt investment obtained from Lane and Milesi-Ferretti (2007). Lane and Milesi-Ferretti use the International Monetary Fund (IMF) data as the original source, and make adjustments for corrections. For example, Canada submits the book value of investments instead of the market value, and Lane and Milesi-Ferretti (LMF) adjust the investment data to market values. The LMF data include foreign equity assets and foreign equity liabilities as well as foreign debt assets and foreign debt liabilities. Equity investments include shares of individual stock, mutual funds, and money market funds, while debt investments include public debt, corporate debt, and bank debt. The only investments not included are those held by central banks for foreign exchange reserves. Foreign equity (debt) assets represents a country’s foreign investment into other countries’ equity (debt) markets while foreign equity (debt) liabilities represents other countries’ investment into the country of interest. 11 For each country in Table 2, we calculate the percentage of a country’s market capitalization that reflects foreign investment. The variables for equity (MCAP_FGN_EQTY) and debt (MCAP_FGN_DEBT) are defined as follows: MCAP_FGN_EQTY= the equity market capitalization that reflects foreign investment relative to the country’s total equity market capitalization. MCAP_FGN_DEBT= the debt market capitalization that reflects foreign investment relative to the country’s total debt market capitalization.  

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(EU-only 36.9 percent), which is significantly larger than the control country foreign equity

market participation of 21.3 percent. By 2007, foreign participation in adopting countries’ equity

markets increased to a mean average of 39 percent (EU-Only 40.6 percent), while control

countries increased to a mean of 25.7 percent. We find no evidence that increases in foreign

equity participation are different between adopting and non-adopting countries.

We also examine the raw change in foreign investment on a by-country (equally

weighted basis), where, for each year, we calculate the foreign investment less the foreign

investment in the previous year scaled by the prior year foreign investment. Consistent with the

before mentioned measures of foreign investment scaled by market capitalization, we fail to find

evidence of unusual increases in foreign investment for adopters. For example, in the year after

mandatory adoption (2005 to 2006), we find the average change in foreign investment for all

adopters to be 39.6 percent (39.2 percent for EU adopters), while the corresponding change for

the control countries is 45.9 percent.

[PLEASE PLACE TABLE 2 HERE]

Table 2, Panel B reports the results for foreign participation in debt markets. For all

adopters, the aggregate (value weighted) mean debt held by foreigners relative to the mean debt

market capitalization increases each year from 60.8 percent in 2003 (EU-Only 60.4 percent) to

67.6 percent in 2007 (EU-Only 67.3 percent) resulting in a 6.7 percent (EU-Only 6.9 percent)

increase. The corresponding increase for the control countries is 4.7 percent, which is consistent

with higher foreign investment flows in debt markets for adopters.

We next examine the by-country (equally weighted) univariate analysis. We begin by

noting that, as with equity markets, adopting countries experience greater mean foreign

participation (All Adopting 58.4 percent; EU-Only 58.6 percent) in their debt markets than

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control countries (mean 42.5 percent) in 2003. We note that the greater foreign participation by

adopting countries leaves less room for a notable increase therein. Nevertheless, by 2007, foreign

debt market mean participation increased for adopters (All-Adopters 63.3 percent; EU-Only 63.6

percent), but it declined for control countries (mean 36.6 percent). Thus, although adopting

countries debt markets already had higher foreign participation in 2003, they show larger gains

in foreign participation in 2007. Tests across samples reveal that both adopting countries and

EU-Only adopters attract significantly more debt investment than control countries.12

We further investigate these differences by examining the yearly changes in raw foreign

investment. We find that in the year after adoption the by-country increase in foreign investment

was 25.3 percent (EU-only 24.5 percent), while the corresponding change for the control

countries was 15.6 percent. This evidence suggests that while both adopting and control

countries have increases in foreign investment after adoption, the adopters have a larger increase.

Finally, we note that both adopting and control countries experience an increase in

foreign debt investment from 2003 to 2004 (20.3 and 10.4, percent respectively). The greater

increase in foreign investment for adopters is likely due to either companies voluntarily adopting

or residual effects from the common currency. However, these increases for both adopting and

control countries converge from 2004 to 2005 (3.1 and 2.5, percent respectively). In order to rule

out the possibility that the increases from 2003 to 2004 are driving the results, we recalculate all

the univariate and multivariate analyses performed throughout the paper (untabulated)

investigating the changes in investment flow from 2004 to 2007 and find quantitatively similar

                                                            12 In untabulated analyses, we also examine the extent to which the findings of increased foreign debt investment reported in Table 2 relate to the majority of adopting countries or merely a select number of countries. We find that 15 of the 17 adopting countries experience an increase in foreign debt investment as a percent of their market capitalizations, while only 5 of the 12 control countries experience a similar increase.

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results.13 Overall, the univariate evidence is consistent with adopting countries experiencing an

increase in foreign debt investment but not equity investment.

Attracting Foreign Investment: Multivariate Tests

In multivariate analyses, we incorporate controls for other determinants of cross-border

investments, namely, the change in GDP (GDP_CHG), which measures the attractiveness of the

country’s investments, and the change in the country’s exchange rate (CURR_CHG), which

reflects the effect of both inflation and interest rate differentials on a country’s ability to attract

foreign capital. We also control for the percentage of a country’s companies (based on market

capitalization) that have voluntarily adopted IFRS on or before 2003 (PCT_IFRS). In addition, in

the debt regression, we control for the change in the country’s public debt (PUBLIC_CHG)

because the available data do not permit disentangling the foreign participation in government

versus corporate debt.14

We predict a positive coefficient on GDP_CHG as country growth is likely to attract

more foreign investment. We have no clear prediction on CURR_CHG as fluctuations in

currency are likely to be offset by corresponding changes in interest rates. We predict a negative

coefficient on PCT_IFRS as mandatory adoption is likely to have a smaller impact on foreign

investment when more companies had already voluntarily adopted IFRS prior to the mandatory

adoption. Finally, we predict a positive coefficient on PUBLIC_CHG as increased government

borrowing is likely to attract more foreign investment.

                                                            13 In an effort to ensure that the effects in the remainder of this paper are driven by increases in foreign investment and not decreases in market capitalizations, we also re-run all the multivariate analyses performed in this paper by investigating the raw change in foreign investment and find quantitatively similar results for both equity and debt. 14 The portfolio debt investment data from the IMF includes government debt, corporate debt, and bank debt. Although it is potentially possible to use national data to parse out different types of debt investments for a small number of countries in our sample, the data is not available for most countries in our analyses.  

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We estimate the following regression in which the dependent variable is the change in the

percentage of the country’s capital market that reflects foreign investments for equity and debt,

respectively:

CHG_MCAP_FGN_EQTY = α + β1 GDP_CHG + β2 CURR_CHG + β3 PCT_IFRS + β4 ADOPT + ε

CHG_MCAP_FGN_DEBT = α + β1 GDP_CHG + β2 CURR_CHG + β3 PCT_IFRS + β4 PUBLIC_CHG + β5 ADOPT + ε

where (see Appendix 1 for detailed definitions of all variables used in the analyses):

CHG_MCAP_FGN_EQTY = MCAP_FGN_EQTY in 2007 less MCAP_FGN_EQTY in 2003;

CHG_MCAP_FGN_DEBT = MCAP_FGN_DEBT in 2007 less MCAP_FGN_DEBT in 2003;

GDP_CHG is the change from 2003 to 2007 in the country’s GDP. The GDP data are obtained from the Central Intelligence Agency's (CIA)-- The World Factbook;

CURR_CHG is the change from 2003 to 2007 in the country’s currency exchange rate relative to the U.S. dollar. The exchange rate data are obtained from the Standard and Poor’s Global Factbook - 2008;

PCT_IFRS is the percentage (based on market values) of the companies within the country that had voluntarily adopted IFRS in 2003; the data are obtained from Global Compustat.

PUBLIC_CHG is the change from 2003 to 2007 in the country’s public debt (total of all government borrowings less repayments). The public debt data are obtained from the Central Intelligence Agency's (CIA) -- The World Factbook;15 and

ADOPT = 1 if the country adopted IFRS in 2005, and ADOPT = 0 otherwise. A significant positive coefficient on ADOPT would suggest increased foreign

participation in the country’s capital market for countries adopting IFRS relative to the control

countries. The results are reported in the first two columns of Table 3 for equity. The first

column reflects the results for all IFRS adopters, while the second column reflects results for

only EU adopters. We note that CHG_GDP and CURR_CHG are both positive and significant,

                                                            15 The CIA World Factbook reports public debt as percentage of GDP. We therefore multiply the CIA’s measure of public debt as a percent of GDP times GDP (purchase power parity).

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suggesting that increases in GDP and exchange rates lead to greater equity investments.

However, we find no significant relation between the change in foreign participation in the

equity market and the adoption of IFRS, for all adopters and for EU-only adopters. These results

do not provide support for our first hypothesis (H1) and suggest that IFRS adoption is not

associated with increased foreign participation in equity markets.

We report the results for debt markets in the last two columns of Table 3. Consistent with

the univariate analysis and our second hypothesis (H2), we find a significant positive coefficient

on ADOPT of 0.1069 (0.1378) for all adopters (EU adopters) with a t-statistic of 3.55 (3.74).16

These results suggest that IFRS adopters attract approximately 11 (14) percent more foreign debt

investment relative to control countries.

[PLEASE PLACE TABLE 3 HERE]

Prior research shows that, for any given set of accounting standards, there can be

significant differences in financial reporting outcomes depending on the quality of the investor

protection and enforcement environment across countries (Ball, et al. 2000; Ball, et al. 2003;

Leuz, et al. 2003; Bushman and Piotroski 2006; Lang, et al. 2006). As noted in Daske, et al.

(2008, 1090), “several countries around the world have substantially revised their enforcement,

auditing, and governance regimes to support the introduction of IFRS reporting.” It is possible,

therefore, that the ADOPT variable proxies for changes in the institutional environment of the

countries that adopt IFRS and that it is the institutional changes and not the adoption of IFRS

that leads to greater foreign investment in the debt markets. To evaluate this possibility, we re-

                                                            16 We also assess whether countries with more IFRS adopters before the mandate experience less foreign investment growth. In untabulated analyses, we replace ADOPT with a continuous variable, PCT_ADOPT, coded as the percentage of the companies within an adopting country that had not voluntarily adopted IFRS by 2003 for adopters, and zero for non-adopters. Consistent with the impact of IFRS adoption being larger when fewer companies in the country had already voluntarily adopted IFRS, we find a significant positive coefficient on PCT_ADOPT.

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examine the regressions on debt markets and control for changes in the degree of investor

protection that occur contemporaneously with IFRS adoption.

We examine the change from 2003 to 2007 in four indicators presented in Kaufmann, et

al. (2009) that capture different dimensions of governance: rule of law, control of corruption,

government effectiveness, and regulatory quality.17 To investigate the relation between IFRS

adoption and foreign participation in the market after considering changes in governance, we run

the regression analyses with CHG_RULE_LAW, CHG_CON_CORRUP, CHG_GOV_EFF, and

CHG_REG_QUAL included as additional explanatory variables. The variables are defined as

follows:

CHG_RULE_LAW captures the change in perceptions from 2003 to 2007 regarding “the extent to which agents have confidence in and abide by the rules of society and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence.”

CHG_CON_CORRUP captures the change in perceptions from 2003 to 2007 regarding “the

extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as ‘capture’ of the state by elites and private interests.”

CHG_GOV_EFF captures the change from 2003 to 2007 in perceptions regarding “the

quality of public services, the quality of civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies.”

CHG_REG_QUAL captures the change from 2003 to 2007 in perceptions regarding “the

ability of government to formulate and implement sound policies and regulations and permit and promote private sector development” (Kaufmann, et al. 2009, 6).

Higher values of these governance indicators indicate higher quality of governance and

investor protection. Therefore, we expect positive coefficients on the change variables if

                                                            17 The study reports worldwide governance indicators for 212 countries between 1996 and 2008. The Kaufmann, et al. (2009) indicators are aggregates of hundreds of specific and disaggregated individual variables measuring various dimensions of governance, taken from 35 data sources provided by 33 different organizations. The data reflect the views on governance of public sector, private sector and non-government experts, as well as thousands of citizen and company survey respondents worldwide. 

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improvements in governance quality are associated with greater foreign participation in the

market.

The results are reported in Table 4. Panel A reports the results for all adopting countries,

while Panel B reports the results for only EU adopting countries. In the first column of Panel A,

we find a significant positive coefficient (t-statistic 2.91) on CHG_RULE_LAW, suggesting that

an increment in the perceptions of rule of law is associated with an increase in foreign

investment into the market. We also find a significant positive coefficient on ADOPT (t-statistic

4.64), which suggests that, after controlling for improvements in the rule of law around IFRS

adoption, IFRS adoption itself is associated with increased foreign investment into the adopting

country’s debt market. In the second column, the coefficient on CHG_CON_CORRUP (t-statistic

1.29) is weakly suggestive that improvements in perceptions of corruption are associated with

greater foreign investment. Again, the coefficient on ADOPT is positive and significant (t-

statistic 3.55) even after controlling for the change in governance around IFRS adoption. In the

third column, we find no evidence of an association between changes in the effectiveness of

governance and increases in foreign debt investment, but the coefficient on ADOPT remains

significant (t-statistic 3.49). In the fourth column, we find a significant positive coefficient on

CHG_REG_QUAL (t-statistic 2.38), suggesting that increases in regulatory quality are associated

with increases in foreign investment in the debt market. Again, after controlling for the change in

governance, we continue to find a significant positive coefficient on ADOPT (t-statistic 3.83). In

the final column, we include each of the governance change variables. We find significant

positive coefficients on CHG_RULE_LAW (t-statistic 2.27) and CHG_REG_QUAL (t-statistic

1.43). We also find a positive and significant coefficient on ADOPT (t-statistic 2.73). These

results suggest that the finding of increased foreign debt investment around IFRS adoption does

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not appear to be driven by potential improvements in governance that are contemporaneous with

IFRS adoption.

The results in Panel B are based on EU adopters only and are similar to those reported in

Panel A. The coefficient on ADOPT remains positive and significant in each of the regressions

reported in Panel B, but there are some slight differences in some of the control variables. For

instance, the coefficient on CHG_GOV_EFF in the third column remains positive but becomes

significant in the EU only adopter sample. This suggests that for the EU countries, increases in

government effectiveness around IFRS adoption are positively associated with increases in

foreign participation in the country’s debt market. Further, in the final column, only the

coefficient on CHG_RULE_LAW is positive and significant (t-statistic 2.36). Overall, the results

from the EU adopter sample provide additional support for the increase in foreign debt

investment for EU adopters around IFRS adoption even after controlling for changes in country

level governance.

[PLEASE PLACE TABLE 4 HERE]

A country’s institutional environment is likely to influence the effect of IFRS adoption on

its capital markets. Research has documented significant differences in the quality of the investor

protection and enforcement environment across countries (Ball, et al. 2000; Ball, et al. 2003;

Leuz, et al. 2003; Bushman and Piotroski 2006; Lang, et al. 2006). Research has also

documented that the quality of accounting standards and the extent of shareholder protection are

positively correlated (LaPorta, et al. 1998). This suggests that IFRS is likely to provide the most

improvement to financial reporting and, therefore, the largest effect on attracting foreign

investors to the capital markets, for countries with weak institutional environments prior to its

adoption.

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In Table 5, we test whether mandatory IFRS adoption has the greatest impact on foreign

participation in the capital markets for countries with weak institutional environments prior to its

adoption. As such, we include both the level of governance quality in 2003

(GOVERNANCE_2003) as well as the interaction ADOPT*GOVERNANCE_2003 for each of the

four governance indicators: rule of law, control of corruption, government effectiveness, and

regulatory quality. To control for the simultaneous improvement in governances, we also include

the change in the governance quality from 2003 to 2007 (CHG_GOVERNANCE) for each of the

corresponding governance indicators. Because all the governance indicators are by definition

higher when there is better corporate governance, we expect a positive coefficient on the change

in governance and a negative coefficient on the interaction variable.

The results are reported in Table 5. We find a significant positive coefficient on

CHG_GOVERNANCE for Rule_Law (t-statistic 1.68) and Reg_Qual (t-statistic 1.54), suggesting

that improvements in governance quality are associated with increased foreign debt investment.

We find a significant positive coefficient on each of the level of governance indicators

(GOVERNANCE_2003), suggesting that higher quality governance is associated with greater

increases in foreign debt participation. We also find a significant positive coefficient on ADOPT

when governance is defined as Rule_Law (t-statistic 4.46), Con_Corrup (t-statistic 3.46), and

Gov_Eff (t-statistic 3.21), suggesting that even after controlling for the level and change in the

quality of governance, IFRS adoption is positively associated with foreign debt investment.

Finally, we find a significant negative coefficient on the ADOPT*GOVERNANCE_2003 when

governance is defined as Rule_Law (t-statistic -3.52), Con_Corrup (t-statistic -2.73), and

Gov_Eff (t-statistic -2.60), suggesting that the economic impact of IFRS adoption is lower for

countries with higher governance prior to adoption.

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The results for the EU-only adopters are presented in Panel B. The results are similar to

those reported for all adopters, with the only exception being that the coefficient on

CHG_GOVERNANCE is positive and significant when governance is defined as Gov_Eff.

Overall, the results support the notion that IFRS adoption has a greater impact on attracting

foreign debt investment for countries with lower quality governance prior to adoption.

[PLEASE PLACE TABLE 5 HERE]

Multivariate Regressions on Investment Pairs

We evaluate whether the results we report at the country level are also evident at the

country-pair level. Specifically, we follow Lane and Milesi-Ferretti (2008) and examine bilateral

investment between countries and control for factors that might be associated with that bilateral

investment in examining whether IFRS adopters attract more foreign investment.18

For each country in our sample, we calculate the foreign equity (debt) asset holdings

from investor countries into investee countries in the sample relative to the country’s total equity

(debt) market capitalization; we label this as MCAP_FGN_EQTY_PR (MCAP_FGN_DEBT_PR).

For each investee country, we then create CHG_MCAP_FGN_EQTY_PR

(CHG_MCAP_FGN_DEBT_PR), which we define as the change in the country’s capital market

equity (debt) investment from each investor country in the sample. Therefore, each investee

country enters into the regression for each investor country. We include the control variables that

were previously included in the country-level analysis; namely, GDP_CHG, PCT_IFRS and

                                                            18 The bilateral investment data are from the Coordinated Portfolio Investment Survey (CPIS) – Geographic Breakdown Tables that are available from the IMF. The CPIS data are collected from a survey of approximately 70 countries. The countries provide foreign equity (debt) assets and liabilities. Foreign equity (debt) assets reflect the country’s investments into individual foreign countries, while foreign equity (debt) liabilities reflect other countries’ investments into the country of interest. Therefore, the CPIS foreign equity assets reflect the detail about the aggregate foreign investment by a country into other countries. The investment is disaggregated by the individual country recipients of that foreign investment. In our analysis, we use the foreign equity (debt) assets to capture the investment by a country into individual foreign countries.  

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PUBLIC_CHG. We further include CURR_CHG_PR to control for the change in the specific

currency relationship between each investee and investor country pair.

In addition, as in Lane and Milesi-Ferretti (2008), we include controls for the relationship

between each investor/investee pair in the regression. Specifically, we include controls for the

correlation between the stock market returns of the investee and investor country and the

correlation between GDP of the investee and investor country to capture potential benefits of the

cross-border investment in terms of diversification. We include a control for the time difference

to capture communication difficulties.19 To capture the extent that barriers to cross-country

investment are diminished, we include indicator variables for the existence of a currency union, a

common language, a tax treaty, and a colonial relationship. An indicator variable for common

legal origin is included to capture similarities in institutional factors between the two countries.

We also include bilateral trade to capture the trade relationship between the investor and investee

countries.

We then add ADOPT to the regression to assess whether the investee countries that adopt

IFRS attract more foreign investment from the pair countries than countries that did not adopt

IFRS. All regressions with investee and investor pairs are performed with two dimensional

clustered robust standard errors to control for both within investee and within investor

correlations (Petersen 2009).

The results are reported in Table 6. The first two columns report the results for equity

market paired investments, while the last two columns report the results for debt market paired

                                                            19 In untabulated results, we also control for communication difficulties using the logarithm of Great Circle distance in miles between the capital cities of the investee and investor countries and find quantitatively similar results in all investment pair analyses.  

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investments.20 The findings related to IFRS adoption corroborate our aggregate analysis at the

country level. Specifically, in the first two columns of Table 6 there is no evidence that IFRS

adoption leads to increased foreign equity investment. In contrast, in the third column which

reports the results for debt investment, we find a significant positive coefficient on ADOPT (t-

statistic 1.78) when all adopting countries are analyzed. The coefficient on ADOPT in column 4

remains significantly positive, although somewhat weaker, when only the EU adopting countries

are investigated (t-statistic 1.51). As expected, the coefficient estimates are substantially smaller

in the country-pair analysis relative to the aggregate estimates, since the dependent variable

represents each individual investor country’s foreign investment scaled by the entire market

capitalization of the investee country. Indeed, aggregating the country-pair coefficient estimates

would approximate the aggregate coefficient estimate.

With respect to control variables, we find that increases in GDP are generally associated

with increased foreign equity investment into the country. Further, we find some weak evidence

that higher correlations in stock market returns are associated with less equity investment into the

investee country, suggesting that lack of diversification potential reduces cross-border

investment. We find a negative relation between equity investment into a country and colonial

relationship between the two countries. We also find that higher levels of IFRS adoption in 2003

result in smaller increases in debt investment. Finally, we find evidence of a positive relation

between debt investment into a country and bilateral trade consistent with more trade

partnerships leading to greater foreign investment.

Overall, the country pair analysis confirms the results from the aggregate country

analysis. The evidence suggests that adoption of IFRS attracts greater foreign investment into

                                                            20 Out of 600 potential country-pairs (25*24), there are 143 (149) country-pairs missing for the equity (debt) analysis. We also lose approximately one-quarter of the observations when we analyze all the 29 sample countries (29*28 possible country-pairs).

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debt markets even after controlling for specific relationships between the investor/investee

countries. However, there is no evidence of adopting countries attracting greater investment into

equity markets.

[PLEASE PLACE TABLE 6 HERE]

Controlling for Changes in Governance

Similar to the aggregate country analysis, we control for changes in country governance

to distinguish whether the observed effect of IFRS adoption on foreign investment is driven by

the change in accounting standards per se or by contemporaneous changes in investor protection/

enforcement laws. Table 7 reveals that the change in investment in country-pairs is not related to

any of the four indicators of changes in governance that we consider (rule of law, control of

corruption, government effectiveness, and regulatory quality) when included in the regression

individually. In the combined regression, we find a positive and significant association between

CHG_RULE_LAW and the change in debt investment (t-statistic 2.22). Further, we continue to

find significant coefficients on ADOPT (t-statistics 1.91, 1.86, 1.48, 1.81, and 2.11, respectively),

suggesting that even after controlling for changes in governance around IFRS adoption, countries

that adopt IFRS experience increased foreign investment into the country by paired investor

countries.

Panel B reports the results for the EU adopters only. Again, we find that the change in

investment in country-pairs in not related to any of the four indicators of changes in governance

when included in the regression individually. However, in the combined regression, we find a

positive and significant coefficient on CHG_RULE_LAW ( t-statistic 3.55). We also continue to

find significant coefficients on ADOPT (t-statistics 1.80, 1.47, 1.34, 1.54, and 2.42, respectively).

In general the results are consistent with IFRS adoption leading to greater foreign investment in

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the debt markets even after considering contemporaneous improvements in governance within

the adopting country.

[PLEASE PLACE TABLE 7 HERE]

Source of the Increased Investment

The results from Tables 6 and 7 suggest that adopting countries experience an increase in

the proportion of their debt markets that reflect foreign investment. This result is consistent with

IFRS adoption reducing processing costs because of greater comparability of financial

statements across more adopting countries, and/or IFRS reducing uncertainty about the quality of

financial reporting. To gain insight on the importance of each effect, we examine the source of

the incremental investment.

We include two indicator variables for whether the investor country is an adopting or

non-adopting country. ADOPT*ADOPT_INVESTOR equals one if both the investee and the

investor countries are adopting countries, and zero otherwise. ADOPT*NON_ADOPT_INVESTOR

equals one if the investee country is an adopting country and the investor country is a non-

adopting country, and zero otherwise. A positive coefficient on ADOPT*ADOPT_INVESTOR is

consistent with both lower processing costs and reduced uncertainty about financial reporting

while a positive coefficient on ADOPT*NON_ADOPT_INVESTOR is consistent only with

reduced uncertainty about financial reporting.

Table 8 provides the results for all adopters and EU only adopters. We find that the

coefficients on both ADOPT*ADOPT_INVESTOR (t-statistic 1.45 for All Adopters and 1.55 for

EU Adopters) and ADOPT*NON_ADOPT_INVESTOR (t-statistic 2.08 for All Adopters and 2.50

for EU Adopters) are positive and significant. This suggests that increases in foreign investment

come from both adopting and non-adopting countries. Finally, the coefficient on

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ADOPT*ADOPT_INVESTOR (.46%) is statistically indistinguishable (untabulated) from the

coefficient on ADOPT*NON_ADOPT_INVESTOR (.60%). This suggests that comparability (for

investors from adopting countries only) does not appear to provide an incremental effect in

attracting greater foreign debt investment flows over the effect from greater reliability of

financial reporting (for investors from both adopting and non-adopting countries).

[PLEASE PLACE TABLE 8 HERE]

Robustness Checks

Some cautions are in order. For instance, it is possible that potential lingering effects

from the EU’s adoption of common currency impact investment flows during the period

examined. That is, The Euro Bond Market Study by the European Central Bank in 2004 indicates

that the adoption of a common currency aided the development of the European debt markets

through 2003. Although we use 2003 as our baseline for our change analysis in an attempt to

exclude the impact of the common currency from the IFRS adoption impact, as previously

discussed we also perform all the analyses (untabulated) investigating the changes in investment

flow from 2004 to 2007 and find quantitatively similar results. Nevertheless, it is possible that

the lingering effects of the common currency contribute to the increase in investment flows into

EU countries during our sample period. We cannot completely rule out this alternative, but the

stronger results documented throughout this study after inclusion of the non-EU IFRS adopting

countries suggest that IFRS has incremental impact beyond the lingering effects of the common

currency.

It is also possible that adopting countries make changes to their legal systems or

implement market factors at the same time they adopt IFRS. We control for the change in several

governance factors, including the country’s rule of law, corruption, government effectiveness

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and regulatory quality from 2003 to 2007. Our results should be interpreted subject to the fact

that these indicators may measure changes in country governance with error. However, the fact

that we find changes in debt but not equity markets is consistent with changes in governance not

being solely responsible for the reported results.

Finally, we caution that the absence of foreign equity investment effects may be due to

the fact that the EU could provide a low power setting in which to evaluate the effects of IFRS

adoption. Specifically, the EU countries are close in geographic proximity, generally engage in

substantial trade, and for the most part have a common currency (excluding Denmark, Sweden

and the United Kingdom). However, our paired analyses attempt to control for these factors

where we continue to find increased debt investment flows (but not equity flows) for adopters.

Further, the lack of results for equity markets continue to hold when the non-EU adopting

countries are included in the sample, which provides some comfort that similarities between the

EU countries are not solely responsible for the lack of results.

V. CONCLUSION

In this study, we provide evidence on the effect of widespread adoption of IFRS on cross-

border investment in equity and debt markets. We use the laboratory provided by the mandated

adoption of IFRS by all EU countries and by four non-EU countries in 2005 to evaluate whether

adopting countries attract more foreign investment than similar sized control countries. Our

results for equity markets reveal that adopting IFRS has no discernable effect on a country’s

ability to attract additional foreign investment. In contrast to equity markets, IFRS adoption has a

positive impact on attracting of foreign investment into the country’s debt market. These findings

are consistent with prior research that recognizes the debt monitoring role of financial statements

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and shows that “that debt markets generate more demand than equity markets for financial

reporting” (Ball et al. 2008, 170).

Our findings suggest that the benefits accruing to companies in equity markets

documented in prior research are appear to derive from investors within the country in which the

company is domiciled. This is consistent with research suggesting that, for foreign equity

investment decisions, non-financial statement factors such as the informational advantages

associated with geographic proximity are of greater importance than information processing

costs or the quality of financial reporting (Coval and Moskowitz 1999, 2001; Malloy 2005; Bae,

et al. 2008). Our findings also suggest that at least part of the benefits accruing to companies in

debt markets (Kim, et al. 2007; Florou and Kosi 2009) derive from foreign investors.

Interpreting the results of this study requires several cautions because we cannot fully

specify the determinants of cross-border investment flows. Although we make design choices to

increase the likelihood of isolating the effect of IFRS adoption on foreign investment flows by (i)

using each country as its own control, (ii) comparing changes in adopting countries to changes in

non-adopting countries, (iii) controlling for contemporaneous changes in country governance,

and (iv) controlling for a number of determinants of foreign investment flows, we cannot rule out

the possibility that other events account for the observed changes. Nevertheless, our results are

consistent with IFRS adoption reducing the agency costs of debt and are relevant for regulators

considering IFRS adoption.

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Page 36: Beneish IFRS Adoption Cross-Border Investments

Variable Definitions (Alphabetical Order)

ADOPT - 1 if the country adopted IFRS in 2005, and ADOPT=0 otherwise

BIL_TRADE - the sum of imports plus exports between source and host countries (average 1997-2001). [Original source: International Monetary Fund, Direction of Trade Statistics]

CHG_MCAP_FGN_DEBT - MCAP_FGN_DEBT in 2007 less MCAP_FGN_DEBT in 2003 (MCAP_FGN_DEBT defined below)

CHG_MCAP_FGN_EQTY - MCAP_FGN_EQTY in 2007 less MCAP_FGN_EQTY in 2003 (MCAP_FGN_EQTY defined below)

CHG_MCAP_FGN_DEBT_PR - MCAP_FGN_DEBT_PR in 2007 less MCAP_FGN_DEBT_PR in 2003 (MCAP_FGN_DEBT_PR defined below)

CHG_MCAP_FGN_EQTY_PR - MCAP_FGN_EQTY_PR in 2007 less MCAP_FGN_EQTY_PR in 2003 (MCAP_FGN_EQTY_PR defined below)

COLONY - a dummy variable equal to one if source and host country ever had a colonial relationship, from Lane and Milesi-Ferretti (2008) [Original source: Rose and Spiegel (2004)]

COM_LANG - a dummy variable equal to one if source and host country share a common language, from Lane and Milesi-Ferretti (2008) [Original source: Rose and Spiegel (2004)]

COM_LEG_ORIG - a dummy variable equal to one if source and host country have a legal system with a common origin (common law, French, German, or Scandinavian), from Lane and Milesi-Ferretti (2008) [Based on elaborations from La Porta, Lopez-de-Silanes, and Schleifer (2005)]

CON_CORRUP - “the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as ‘capture’ of the state by elites and private interests,” as defined by Kaufmann, Kraay, and Mastruzzi (2009 p. 6)

COR_GROWTH - the correlation between the annual GDP growth rates in the source and host country over the period 1980-2000 (1980-1989 in the IV estimation), from Lane and Milesi-Ferretti (2008) [Based on calculations from the World Bank and World Development Indicators]

COR_STOCK_RET - the correlation between the annual GDP growth rates in the source and real stock returns in the host country over the period 1980-2000 (1980-1989 in the IV estimation), from Lane and Milesi-Ferretti (2008) [Based on calculations from Datastream, Morgan Stanley Capital International, and World Development Indicators]

CURR_CHG - the change from 2003 to 2007 in the country’s currency exchange rate relative to the U.S. dollar. The exchange rate data are obtained from the Standard and Poor’s Global Factbook - 2008

CURR_CHG_PR - the change from 2003 to 2007 in the investee country’s currency exchange rate relative to the investor country's currency. The exchange rate data are obtained from the Standard and Poor’s Global Factbook - 2008

CURR_UNION - a dummy variable equal to one if the source and host country are in a currency union, from Lane and Milesi-Ferretti (2008) [Original source: Rose and Spiegel (2004)]

GDP_CHG - the change from 2003 to 2007 in the country’s GDP, where GDP "is measured as the value of all final goods and services produced within a nation in a given year. A nation's GDP at purchasing power parity (PPP) exchange rates is the sum value of all goods and services produced in the country valued at prices prevailing in the United States" {Source: Central Intelligence Agency's (CIA) - The World Factbook [https://www.cia.gov/library/publications/the-world-factbook/]

GOV_EFF - “the quality of public services, the quality of civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies,” as defined by Kaufmann, Kraay, and Mastruzzi (2009 p. 6)

MCAP_FGN_DEBT - the debt market capitalization that reflects foreign investment relative to the country’s total debt market capitalization, where domestic debt held by foreigners are from Lane and Milesi-Ferretti (2006) and the domestic debt securities outstanding of a country are from the Bank for International Settlements (BIS).

MCAP_FGN_EQTY - the equity market capitalization that reflects foreign investment relative to the country’s total equity market capitalization, where domestic equity held by foreigners are from Lane and Milesi-Ferretti (2006) and stock market capitalization data are from the Standard and Poor’s Global Stock Markets Factbook-2008

MCAP_FGN_DEBT_PR - the debt market capitalization that reflects foreign investment from a specific investor country relative to an investee country’s total debt market capitalization, where the specific investor country's debt investment is obtained from the CPIGeographic Breakdown Tables and the domestic debt securities outstanding of an investee country are from the Bank for International Settlements (BIS).

MCAP_FGN_EQTY_PR - the equity market capitalization that reflects foreign investment from a specific investor country relative to an investee country’s total equity market capitalization, where the specific investor country's equity investment is obtained from the CPIS - Geographic Breakdown Tables and the stock market capitalization data for the investee country are from the S & P’s Global Stock Markets Factbook-2008

PCT_IFRS - the percentage (based on market value of equity) of the companies within the country that had voluntarily adopted IFRS in 2003. The data are obtained from Global Compustat

PUBLIC_CHG - the change from 2003 to 2007 in the country’s public debt (total of all government borrowings less repayments). The public debt data are obtained from the Central Intelligence Agency's (CIA) The World Factbook

REG_QUAL - “the ability of government to formulate and implement sound policies and regulations and permit and promote private sector development,” as defined by Kaufmann, Kraay, and Mastruzzi (2009 p. 6)

RULE_LAW - "the extent to which agents have confidence in and abide by the rules of society and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence,” as defined by Kaufmann, Kraay, and Mastruzzi (2009 p. 6)

TAX_TREATY - a dummy variable equal to one if the source and host country have a tax treaty enacted prior to 1999, from Lane and Milesi-Ferretti (2008) [Based on elaborations from from tax treaty data taken from http://www.unctad.org]

TIME_DIFF - absolute value of the time difference between source and host country (ranging from 1 to 12), from Lane and Milesi-Ferretti (2008) [Original source: http://www.timeanddate.com

Appendix 1Variable Definitions

Page 37: Beneish IFRS Adoption Cross-Border Investments

Country EQTY_CAP DEBT_CAP Country EQTY_CAP DEBT_CAP

EU Adopters Control Countries

Austria 55.09             601.08          Brazil 234.56          520.60         

Belgium 173.55           1,174.93       Canada 893.95          1,260.08       

Denmark 121.62           657.22          China 681.20          648.83         

Finland 170.28           262.27          Hong Kong 551.24          319.52         

France 1,355.93        3,957.94       India 279.09          303.86         

Germany 1,079.03        4,945.10       Japan 3,040.67      9,146.74       

Greece 106.85           372.81          Korea 329.62          599.53         

Italy 614.84           3,501.04       Malaysia 168.38          147.26         

Netherlands 488.65           1,761.31       Mexico 122.53          307.95         

Portugal 58.29             396.88          Singapore 229.33          232.19         

Spain 726.24           1,537.86       Thailand 119.05          102.62         

Sweden 289.88           633.17          United States 14,266.27   23,939.10    

United Kingdom 2,460.06        6,091.37      

Other Adopters

Australia 585.48           671.47         

Norway 94.68             317.94         

South Africa 267.75           111.87         

Switzerland 726.95           978.70         

All Adopters Control Countries

Mean 551.48           1,645.47      Mean 1,742.99     3,127.36      

Median 488.65           671.47          Median 304.35          420.06         

# OBS 17 17 n 12 12

EU Adopters Control Countries

Mean 592.33           1,991.77      Mean 1,742.99     3,127.36      

Median 289.88           1,174.93      Median 304.35          420.06         

# OBS 13 13 n 12 12

Table 1

Descriptive Statistics ‐ Size of Capital Markets

This table provides descriptive evidence about capital market size for the IFRS adoption sample and the control

sample. EQTY_CAP is the country’s equity market capitalization at the end of 2003 (in $ billions), which is

obtained from Standard & Poor’s Global Stock Markets Factbook 2008; DEBT_CAP is the country’s debt market

capitalization at the end of 2003 (in $ billions), which is obtained from the Bank for International Settlements

(BIS) 2004 Quarterly Reviews (outstanding domestic debt securities) plus the foreign debt investment obtained

from Lane and Milesi‐Ferretti.

Page 38: Beneish IFRS Adoption Cross-Border Investments

Panel A:  Equity Market

2003 2004 2005 2006 2007

 Change 

2003‐2007 

 Change 

2003‐2007 

All Adopting Countries:

Aggregate Statistics

   Mean Domestic Equity Held by Foreigners 198.67         238.81       272.006 369.415 417.73       219.06        

   Mean Equity Market Cap 551.48         664.98       723.81       956.72       1,094.12   542.64        

   Mean Foreign Investment / Mean Market Cap 36.02% 35.91% 37.58% 38.61% 38.18% 2.15%

By Country Statistics

   Mean MCAP_FGN_EQTY 34.97% 36.66% 38.89% 39.07% 38.90% 3.93% **

   Median MCAP_FGN_EQTY 30.96% 32.94% 34.97% 36.48% 36.17% 5.21% # #

Changes in Foreign Investment By Country Statistics

    Mean Change in Foreign Investment 35.44% 18.55% 39.56% 22.03% 182.98%

    Median Change in Foreign Investment 34.60% 16.49% 38.54% 26.19% 131.10%

   # OBS 17 17 17 17 17

European Union Adopting Countries

Aggregate Statistics

   Mean Domestic Equity Held by Foreigners 213.91         259.14         291.17         397.38         446.00         232.09        

   Mean Equity Market Cap 592.33         700.42         754.28         996.91         1,141.24     548.91        

   Mean Foreign Investment / Mean Market Cap 36.11% 37.00% 38.60% 39.86% 39.08% 2.97%

By Country Statistics

   Mean MCAP_FGN_EQTY 36.89% 39.23% 41.49% 41.36% 40.60% 3.71% **

   Median MCAP_FGN_EQTY 33.59% 33.46% 36.45% 38.19% 36.17% 2.58% # # 

Changes in Foreign Investment By Country Statistics

    Mean Change in Foreign Investment 35.21% 14.66% 39.16% 20.65% 165.61%

    Median Change in Foreign Investment 34.60% 13.84% 38.98% 15.66% 127.39%

   # OBS 13 13 13 13 13

Control Countries:

Aggregate Statistics

   Mean Domestic Equity Held by Foreigners 257.61         314.40       388.66       486.75       594.27       336.66        

   Mean Equity Market Cap 1,742.99     2,032.14   2,272.42   2,711.60   3,297.37   1,554.38     

   Mean Foreign Investment / Mean Market Cap 14.78% 15.47% 17.10% 17.95% 18.02% 3.24%

By Country Statistics

   Mean MCAP_FGN_EQTY 21.28% 22.07% 23.60% 25.83% 25.74% 4.46%

   Median MCAP_FGN_EQTY 19.44% 20.88% 23.37% 27.07% 27.94% 8.50%

Changes in Foreign Investment By Country Statistics

    Mean Change in Foreign Investment 29.61% 35.52% 45.83% 41.72% 285.87%

    Median Change in Foreign Investment 31.68% 33.83% 45.99% 41.16% 198.27%

   # OBS 12 12 12 12 12

By Country Differences Between All Adopting and Control Countries:

t‐test of mean differences  ‐0.53%

Wilcoxin signed rank test on median  ‐3.29%

By Country Differences Between European Union Adopting and Control Countries:

   t‐test of mean differences  ‐0.75%

   Wilcoxin signed rank test on median  ‐5.92%

This panel provides by year univariate univariate statistics on the percentage of a country’s equity market capitalization that reflects foreign equity investment for all (EU

only) IFRS adopters and control countries. All aggregate investment data is reported in $ Billions. Aggregate foreign investment data are obtained from Lane and Milesi‐

Ferretti, while the stock market capitalization data are from the Standard and Poor’s Global Stock Markets Factbook – 2008. The mean (median) Change in Foreign 

Investment is calculated as the the current year by country foreign investement less the previous year by country foreign investment scaled by the previous year by country 

foreign investment. MCAP_FGN_EQTY is the equity market capitalization that reflects foreign investment relative to the country’s total equity market capitalization.***, 

**, and * (###, ##, and #) indicate two‐tailed significant differences in means (medians) at the 1%, 5%, and 10% levels, respectively. 

Table 2

Univariate Statistics

Page 39: Beneish IFRS Adoption Cross-Border Investments

Panel B:  Debt Market

2003 2004 2005 2006 2007

 Change 

2003‐2007 

 Change 

2003‐2007 

All Adopting Countries:

   Mean Domestic Debt Held by Foreigners 1,000.33     1,215.55   1,268.64   1,570.77   1,970.31   969.98        

   Mean Debt Market Cap 1,645.47     1,929.64   1,925.77   2,354.92   2,920.77   1,275.30     

   Mean Foreign Investment / Mean Market Cap 60.79% 62.99% 65.88% 66.70% 67.46% 6.67%

By Country Statistics

   Mean MCAP_FGN_DEBT 58.41% 59.17% 61.27% 62.65% 63.25% 4.84% ***

   Median MCAP_FGN_DEBT 57.71% 59.67% 62.24% 62.38% 63.50% 5.79% # # #

Changes in Foreign Investment By Country Statistics

    Mean Change in Foreign Investment 20.03% 3.08% 25.31% 25.73% 95.26%

    Median Change in Foreign Investment 21.13% 4.02% 24.09% 23.81% 90.40%

   # OBS 17 17 17 17 17

European Union Adopting Countries

Aggregate Statistics

   Mean Domestic Debt Held by Foreigners 1,202.18     1,468.25   1,529.35   1,894.14   2,364.33   1,162.15     

   Mean Debt Market Cap 1,991.77     2,338.30   2,328.42   2,849.32   3,514.19   1,522.42     

   Mean Foreign Investment / Mean Market Cap 60.36% 62.79% 65.68% 66.48% 67.28% 6.92%

By Country Statistics

   Mean MCAP_FGN_DEBT 58.60% 59.81% 61.82% 62.95% 63.58% 4.98% ***

   Median MCAP_FGN_DEBT 57.71% 59.67% 62.24% 62.38% 63.50% 5.79% # # #

Changes in Foreign Investment By Country Statistics

    Mean Change in Foreign Investment 21.33% 1.99% 24.47% 24.62% 92.62%

    Median Change in Foreign Investment 22.16% 1.50% 24.09% 23.81% 90.40%

   # OBS 13 13 13 13 13

Control Countries:

Aggregate Statistics

   Mean Domestic Debt Held by Foreigners 797.99         947.35       1,018.78   1,208.47   1,430.82   632.83        

   Mean Debt Market Cap 3,127.36     3,533.25   3,745.45   4,220.08   4,742.69   1,615.33     

   Mean Foreign Investment / Mean Market Cap 25.52% 26.81% 27.20% 28.64% 30.17% 4.65%

By Country Statistics

   Mean MCAP_FGN_DEBT 42.52% 40.53% 38.09% 36.88% 36.63% ‐5.89% *

   Median MCAP_FGN_DEBT 38.81% 34.38% 30.17% 31.49% 29.00% ‐9.81%

Changes in Foreign Investment By Country Statistics

    Mean Change in Foreign Investment 10.41% 2.53% 15.55% 21.19% 61.75%

    Median Change in Foreign Investment 11.27% 2.45% 13.06% 16.76% 58.55%

   # OBS 12 12 12 12 12

By Country Differences Between All Adopting and Control Countries:

t‐test of mean differences  10.73% ***

Wilcoxin signed rank test on median  15.60% # # #

By Country Differences Between European Union Adopting and Control Countries:

   t‐test of mean differences  10.87% ***

   Wilcoxin signed rank test on median  15.60% # # #

Table 2

Univariate Statistics

This panel provides by year univariate univariate statistics on the percentage of a country’s debt market capitalization that reflects foreign debt investment for all (EU

only) IFRS adopters and control countries. All aggregate investment data is reported in $ Billions. Aggregate foreign investment data are obtained from Lane and Milesi‐

Ferretti, while the domestic debt securities outstanding of a country are from the Bank for International Settlements (BIS). The mean (median) Change in Foreign 

Investment is calculated as the the current year by country foreign investement less the previous year by country foreign investment scaled by the previous year by 

country foreign investment. MCAP_FGN_DEBT is the debt market capitalization that reflects foreign investment relative to the country’s total debt market capitalization. 

***, **, and * (###, ##, and #) indicate two‐tailed significant differences in means (medians) at the 1%, 5%, and 10% levels, respectively. 

Page 40: Beneish IFRS Adoption Cross-Border Investments

Variable

Intercept 0.0002 ‐0.0005 ‐0.0719 ** ‐0.0704 **

( 0.01)  (‐0.01) (‐2.29) (‐2.12)

GDP_CHG + 0.1970 ** 0.1990 ** ‐0.0611 ‐0.0919

( 2.31)  ( 2.11)  (‐0.63) (‐0.86)

CURR_CHG + / ‐ 0.0005 * 0.0005 * 0.0000 0.0001

( 1.98)  ( 1.88)  ( 0.09)  ( 0.43) 

PCT_IFRS ‐ ‐0.0334 ‐0.0283 0.0590 ‐0.0163

(‐0.51) (‐0.29) ( 0.91)  (‐0.17)

PUBLIC_CHG + 0.0959 ** 0.1323 **

( 2.31)  ( 2.48) 

ADOPT + ‐0.0043 ‐0.0105 0.1069 *** 0.1378 ***

(‐0.14) (‐0.28) ( 3.55)  ( 3.74) 

# OBS 25

ADJUSTED R‐Square 0.1308

F Value 1.90

25

0.3198

4.68

29

0.4242

5.13

This table reports coefficients and, in parentheses, t‐statistics for OLS regression models that explain the change in foreign

investment between 2003 and 2007 for equity (debt) in columns 1 & 2 (columns 3 & 4). Columns 1 & 3 (2 & 4) include all IFRS

(only EU) adopters. All variables are defined in Appendix A. ***, ** and * indicate statistical significance at the 1%, 5%, and 10%

levels, respectively, in one‐tail tests where the sign is predicted and in two‐tail tests where the sign is not predicted.

Coefficient

(t‐statistic)

CHG_MCAP_FGN_EQTY CHG_MCAP_FGN_DEBT

Table 3

Aggregate Data Multivariate Regressions

29

0.1625

2.36

Coefficient

(t‐statistic)

All Adopters

Coefficient

(t‐statistic)

All Adopters

Coefficient

(t‐statistic)

EU AdoptersEU Adopters

Page 41: Beneish IFRS Adoption Cross-Border Investments

Panel A:  All Adopters

Variable

Intercept ‐0.0709 ** ‐0.0597 * ‐0.0751 ** ‐0.0799 ** ‐0.0710 **

(‐2.60) (‐1.85) (‐2.37) (‐2.77) (‐2.42)

GDP_CHG + ‐0.0490 ‐0.0480 ‐0.0461 ‐0.0209 ‐0.0526

(‐0.58) (‐0.50) (‐0.47) (‐0.23) (‐0.62)

CURR_CHG + / ‐ 0.0002 0.0001 0.0000 0.0002 0.0002

( 0.65)  ( 0.19)  ( 0.15)  ( 0.58)  ( 0.96) 

PCT_IFRS ‐ 0.0131 0.0359 0.0390 0.0838 0.0709

( 0.22)  ( 0.54)  ( 0.57)  ( 1.40)  ( 1.08) 

PUBLIC_CHG + 0.0775 ** 0.0813 ** 0.0817 ** 0.0824 ** 0.0981 ***

( 2.12)  ( 1.92)  ( 1.83)  ( 2.16)  ( 2.54) 

CHG_RULE_LAW + 0.2610 *** 0.3153 **

( 2.91)  ( 2.27) 

CHG_CON_CORRUP + 0.1055 * ‐0.0155( 1.29)  (‐0.17)

CHG_GOV_EFF + 0.0527 ‐0.1199( 0.90)  (‐1.65)

CHG_REG_QUAL + 0.2058 ** 0.1531 *( 2.38)  ( 1.43) 

ADOPT + 0.1250 *** 0.1055 *** 0.1230 *** 0.1053 *** 0.0911 ***

( 4.64)  ( 3.55)  ( 3.49)  ( 3.83)  ( 2.73) 

# OBS 29 29 29 29 29

ADJUSTED R‐Square 0.5656 0.4390 0.4192 0.5213 0.5806

F Value 7.08 4.61 4.37 6.08 5.31

This panel reports coefficients and, in parentheses, t‐statistics for OLS regression models that explain the change in foreign investment between

2003 and 2007 for debt after including changes in country level governance for all IFRS adopters. All variables are defined in Appendix A.  ***, ** 

and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively, in one‐tail tests where the sign is predicted and in two‐tail tests 

where the sign is not predicted.

Rule_Law Con_Corrup Gov_Eff Reg_Qual All Governance

Coefficient

(t‐statistic)

Table 4 

Aggregate Data Multivariate Regressions ‐ Governance Changes

CHG_MCAP_FGN_DEBT

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Page 42: Beneish IFRS Adoption Cross-Border Investments

Panel B:  European Union Adopters

Variable

Intercept ‐0.0645 ** ‐0.0557 ‐0.0750 ** ‐0.0840 *** ‐0.0711 **

(‐2.51) (‐1.65) (‐2.31) (‐2.91) (‐2.45)

GDP_CHG + ‐0.1057 ‐0.0776 ‐0.0767 ‐0.0285 ‐0.0934

(‐1.27) (‐0.74) (‐0.73) (‐0.30) (‐1.02)

CURR_CHG + / ‐ 0.0004 0.0002 0.0002 0.0003 0.0004

( 1.40)  ( 0.54)  ( 0.63)  ( 1.08)  ( 1.53) 

PCT_IFRS ‐ ‐0.0921 ‐0.0386 ‐0.0561 ‐0.0022 ‐0.0491

(‐1.20) (‐0.41) (‐0.58) (‐0.03) (‐0.58)

PUBLIC_CHG + 0.1255 *** 0.1141 ** 0.1161 ** 0.1164 ** 0.1375 ***

( 3.03)  ( 2.13)  ( 2.19)  ( 2.52)  ( 3.05) 

CHG_RULE_LAW + 0.3160 *** 0.3527 ***

( 3.70)  ( 2.36) 

CHG_CON_CORRUP + 0.1236 * ‐0.0386

( 1.44)  (‐0.43)

CHG_GOV_EFF + 0.0914 * ‐0.0862

( 1.46)  (‐1.17)

CHG_REG_QUAL + 0.2452 *** 0.1264

( 2.80)  ( 1.08) 

ADOPT + 0.1713 *** 0.1372 *** 0.1724 *** 0.1397 *** 0.1437 ***

( 5.73)  ( 3.83)  ( 4.02)  ( 4.43)  ( 3.64) 

# OBS 25 25 25 25 25

ADJUSTED R‐Square 0.6604 0.4646 0.4656 0.5842 0.6461

F Value 8.78 4.47 4.49 6.62 5.87

This panel reports coefficients and, in parentheses, t‐statistics for OLS regression models that explain the change in foreign investment between

2003 and 2007 for debt after including changes in country level governance for EU only adopters. All variables are defined in Appendix A.  ***, ** 

and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively, in one‐tail tests where the sign is predicted and in two‐tail tests 

where the sign is not predicted.

Table 4 ‐ Cont'd

Aggregate Data Multivariate Regressions ‐ Governance Changes

CHG_MCAP_FGN_DEBT

Rule_Law Con_Corrup Gov_Eff Reg_Qual All Governance

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Page 43: Beneish IFRS Adoption Cross-Border Investments

Panel A:  All Adopters

Variable

Intercept ‐0.1016 *** ‐0.0851 *** ‐0.1163 *** ‐0.0949 ***

(‐5.23) (‐3.65) (‐5.13) (‐3.87)

GDP_CHG + ‐0.1147 ‐0.1914 ‐0.1974 ‐0.1585

(‐1.91) (‐2.52) (‐2.74) (‐1.86)

CURR_CHG + / ‐ 0.0000 ‐0.0002 ‐0.0001 0.0000

(‐0.17) (‐0.99) (‐0.36) (‐0.20)

PCT_IFRS ‐ 0.0298 0.0379 0.0244 0.0646

( 0.75)  ( 0.81)  ( 0.54)  ( 1.21) 

PUBLIC_CHG + 0.0474 ** 0.0609 ** 0.0546 ** 0.0592 **

( 1.87)  ( 1.98)  ( 1.78)  ( 1.82) 

CHG_GOVERNANCE + 0.1193 ** 0.0148 0.0471 0.1179 *

( 1.68)  ( 0.21)  ( 1.13)  ( 1.54) 

ADOPT + 0.1586 *** 0.1371 *** 0.1705 *** 0.0326( 4.46)  ( 3.46)  ( 3.21)  ( 0.51) 

GOVERNANCE_2003 + 0.0888 *** 0.0841 *** 0.0996 *** 0.0779 ***

( 5.22)  ( 4.93)  ( 5.54)  ( 3.42) 

ADOPT*GOVERNANCE_2003 ‐ ‐0.0818 *** ‐0.0664 *** ‐0.0760 *** 0.0070(‐3.52) (‐2.73) (‐2.60) ( 0.39) 

# OBS 29 29 29 29

ADJUSTED R‐Square 0.8017 0.7362 0.7500 0.6675

F Value 15.15 10.11 11.50 8.03

Table 5

Aggregate Data Multivariate Regressions ‐ Governance Interactions

CHG_MCAP_FGN_DEBT

Rule_Law Con_Corrup Gov_Eff Reg_Qual

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

This panel reports coefficients and, in parentheses, t‐statistics for OLS regression models that explain the change in foreign 

investment for all adopters in our sample between 2003 and 2007 for debt with interactions between 2003 governance levels and 

ADOPT. All variables are defined in Appendix A.  ***, ** and * indicate statistical significance at the 1%, 5%, and 10% levels, 

respectively, in one‐tail tests where the sign is predicted and in two‐tail tests where the sign is not predicted.

Page 44: Beneish IFRS Adoption Cross-Border Investments

Panel B:  European Union Adopters

Variable

Intercept ‐0.0921 *** ‐0.0796 *** ‐0.1128 *** ‐0.1002 ***

(‐4.94) (‐3.18) (‐5.31) (‐4.16)

GDP_CHG + ‐0.1314 ** ‐0.2014 ** ‐0.2139 *** ‐0.1369 *

(‐2.30) (‐2.54) (‐3.11) (‐1.63)

CURR_CHG + / ‐ 0.0001 ‐0.0002 0.0000 0.0000

( 0.45)  (‐0.65) ( 0.07)  ( 0.09) 

PCT_IFRS ‐ ‐0.0295 ‐0.0108 ‐0.0356 0.0081

(‐0.55) (‐0.16) (‐0.60) ( 0.12) 

PUBLIC_CHG + 0.0628 ** 0.0740 ** 0.0706 ** 0.0658 *

( 2.00)  ( 1.70)  ( 1.87)  ( 1.62) 

CHG_GOVERNANCE + 0.2109 ** 0.0333 0.0793 ** 0.1635 **

( 2.30)  ( 0.40)  ( 1.86)  ( 2.16) 

ADOPT + 0.2217 *** 0.1523 *** 0.1990 *** 0.0371

( 3.56)  ( 2.86)  ( 3.15)  ( 0.52) 

GOVERNANCE_2003 + 0.0767 *** 0.0802 *** 0.0961 *** 0.0765 ***

( 4.44)  ( 4.51)  ( 5.43)  ( 3.31) 

ADOPT*GOVERNANCE_2003 ‐ ‐0.0975 ** ‐0.0612 ** ‐0.0698 ** 0.0135

(‐2.52) (‐1.72) (‐1.91) ( 0.63) 

# OBS 25 25 25 25

ADJUSTED R‐Square 0.8433 0.7362 0.8005 0.7229

F Value 17.14 9.37 13.04 8.83

This panel reports coefficients and, in parentheses, t‐statistics for OLS regression models that explain the change in foreign investment 

for European Union adopters in our sample between 2003 and 2007 for debt with interactions between 2003 governance levels and 

ADOPT. All variables are defined in Appendix A.  ***, ** and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively, 

in one‐tail tests where the sign is predicted and in two‐tail tests where the sign is not predicted.

Table 5 ‐ Cont'd

Aggregate Data Multivariate Regressions ‐ Governance Interactions

CHG_MCAP_FGN_DEBT

Rule_Law Con_Corrup Gov_Eff Reg_Qual

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Page 45: Beneish IFRS Adoption Cross-Border Investments

Variable

Intercept 0.0020 0.0039 ‐0.0220 ** ‐0.0215 **

( 0.15)  ( 0.42)  (‐2.07) (‐1.76)

GDP_CHG + 0.0102 ** 0.0075 * 0.0035 0.0059

( 1.97)  ( 1.55)  ( 0.66)  ( 0.81) 

CURR_CHG_PR + / ‐ 0.0000 0.0000 0.0000 *** 0.0000

(‐0.06) ( 0.12)  ( 7.21)  ( 0.86) 

PCT_IFRS ‐ 0.0053 0.0216 ‐0.0129 *** ‐0.0168 ***

( 0.84)  ( 2.00)  (‐3.04) (‐2.07)

PUBLIC_CHG + ‐0.0034 ‐0.0014

(‐1.90) (‐0.46)

COR_STOCK_RET + / ‐ ‐0.0103 * ‐0.0128 * 0.0061 0.0062

(‐1.70) (‐1.95) ( 1.12)  ( 1.05) 

COR_GROWTH + / ‐ 0.0002 0.0029 ‐0.0001 0.0005

( 0.11)  ( 1.42)  (‐0.03) ( 0.14) 

TIME_DIFF + / ‐ ‐0.0003 ‐0.0004 ‐0.0003 ‐0.0002

(‐1.02) (‐1.15) (‐0.83) (‐0.56)

CURR_UNION + / ‐ ‐0.0022 ‐0.0032 0.0027 0.0025

(‐0.72) (‐0.97) ( 1.29)  ( 1.27) 

BIL_TRADE + / ‐ 0.0001 0.0002 0.0016 ** 0.0015 **

( 0.10)  ( 0.26)  ( 2.31)  ( 1.96) 

COM_LANG + / ‐ 0.0033 0.0025 0.0015 0.0014

( 1.28)  ( 1.00)  ( 0.89)  ( 0.63) 

TAX_TREATY + / ‐ 0.0003 ‐0.0012 ‐0.0010 ‐0.0004

( 0.10)  (‐0.34) (‐0.64) (‐0.20)

COLONY + / ‐ ‐0.0174 *** ‐0.0156 *** 0.0016 0.0029

(‐2.64) (‐2.95) ( 1.24)  ( 1.51) 

COM_LEG_ORIG + / ‐ 0.0025 0.0012 0.0008 0.0002

( 1.42)  ( 0.82)  ( 0.53)  ( 0.12) 

ADOPT + ‐0.0053 ‐0.0105 0.0047 ** 0.0063 *

(‐1.73) (‐2.70) ( 1.78)  ( 1.51) 

# OBS 457

R‐Square 0.1243

F Value 2.84

Table 6

Investment Pairs ‐ Multivariate Regressions 

CHG_MCAP_FGN_EQTY CHG_MCAP_FGN_DEBT

All Adopters EU Adopters All Adopters EU Adopters

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

540 532 451

This table reports coefficients and, in parentheses, t‐statistics for OLS regression models that explain the change in foreign investment

between 2003 and 2007 for equity (debt) investee/investor pairs in columns 1 and 2 (3 and 4) for IFRS adopters. Where columns 1 and 3

(2 and 4) reflect the sample of All (EU) adopters in our sample. All variables are defined in Appendix A. In this Table, GDP_CHG, PCT_IFRS, 

PUBLIC_CHG, and ADOPT are based on the investee country. All regressions are performed with two dimensional clustered robust

standard errors to control for both within investee and within investor correlations (Petersen 2009). ***, ** and * indicate statistical

significance at the 1%, 5%, and 10% levels, respectively, in one‐tail tests where the sign is predicted and in two‐tail tests where the sign

is not predicted.

0.0763 0.2019 0.2051

2.65 7.68 7.89

Page 46: Beneish IFRS Adoption Cross-Border Investments

Panel A:  All Adopters

Variable

Intercept ‐0.0211 ** ‐0.0208 ** ‐0.0219 ** ‐0.0212 ** ‐0.0164 **

(‐1.91) (‐2.14) (‐2.01) (‐1.98) (‐1.71)

GDP_CHG + 0.0035 0.0024 0.0035 0.0042 0.0020

( 0.66)  ( 0.41)  ( 0.62)  ( 0.75)  ( 0.34) 

CURR_CHG_PR + / ‐ 0.0000 *** 0.0000 *** 0.0000 *** 0.0000 *** 0.0000 *

( 2.70)  ( 8.01)  ( 5.70)  ( 2.46)  ( 1.75) 

PCT_IFRS ‐ ‐0.0140 *** ‐0.0108 *** ‐0.0131 *** ‐0.0122 *** ‐0.0108 **

(‐3.31) (‐2.85) (‐2.79) (‐3.02) (‐2.02)

PUBLIC_CHG + ‐0.0038 ‐0.0022 ‐0.0036 ‐0.0040 ‐0.0028

(‐1.88) (‐1.38) (‐1.40) (‐1.87) (‐1.17)

COR_STOCK_RET + / ‐ 0.0057 0.0086 0.0060 0.0056 0.0092

( 1.07)  ( 1.44)  ( 1.08)  ( 1.05)  ( 1.69) 

COR_GROWTH + / ‐ ‐0.0001 0.0000 ‐0.0001 ‐0.0001 ‐0.0001

(‐0.04) ( 0.00)  (‐0.03) (‐0.05) (‐0.05)

TIME_DIFF + / ‐ ‐0.0003 ‐0.0003 ‐0.0003 ‐0.0003 ‐0.0003

(‐0.81) (‐0.90) (‐0.84) (‐0.84) (‐0.93)

CURR_UNION + / ‐ 0.0031 0.0019 0.0028 0.0029 0.0024

( 1.41)  ( 0.85)  ( 1.23)  ( 1.39)  ( 1.13) 

BIL_TRADE + / ‐ 0.0015 ** 0.0014 ** 0.0016 ** 0.0015 ** 0.0011 *

( 2.17)  ( 2.28)  ( 2.26)  ( 2.26)  ( 1.74) 

COM_LANG + / ‐ 0.0012 0.0019 0.0015 0.0012 0.0010

( 0.78)  ( 1.14)  ( 1.00)  ( 0.83)  ( 0.69) 

TAX_TREATY + / ‐ ‐0.0010 ‐0.0013 ‐0.0010 ‐0.0010 ‐0.0015

(‐0.63) (‐0.79) (‐0.64) (‐0.63) (‐0.88)

COLONY + / ‐ 0.0015 0.0013 0.0016 0.0014 0.0008

( 1.32)  ( 0.88)  ( 1.21)  ( 1.21)  ( 0.50) 

COM_LEG_ORIG + / ‐ 0.0010 0.0004 0.0008 0.0010 0.0013

( 0.75)  ( 0.31)  ( 0.55)  ( 0.73)  ( 0.96) 

CHG_RULE_LAW + 0.0056 0.0167 **

( 0.88)  ( 2.22) 

CHG_CON_CORRUP + ‐0.0102 ‐0.0197

(‐1.87) (‐3.42)

CHG_GOV_EFF + 0.0005 ‐0.0008

( 0.10)  (‐0.13)

CHG_REG_QUAL + 0.0058 0.0064

( 0.81)  ( 0.71) 

ADOPT + 0.0051 ** 0.0048 ** 0.0048 * 0.0045 ** 0.0055 **

( 1.91)  ( 1.86)  ( 1.48)  ( 1.81)  ( 2.11) 

# OBS 532 532 532 532 532

R‐Square 0.2051 0.2188 0.2020 0.2057 0.2481

F Value 7.89 7.43 7.16 7.75 8.31

Coefficient

(t‐statistic)

Pair Data Multivariate Regressions ‐ Governance Changes

Table 7

This panel reports coefficients and, in parentheses, t‐statistics for OLS regression models that explain the change in foreign investment between 2003 and 2007 for 

debt investee/investor pairs for all IFRS adopters after including changes in country level governance. All variables are defined in Appendix A. In this panel, GDP_CHG, 

PCT_IFRS, PUBLIC_CHG, CHG_GOVERNANCE, and ADOPT are based on the investee country.  All regressions are performed with two dimensional clustered robust 

standard errors to control for both within investee and within investor correlations (Petersen 2009). ***, ** and * indicate statistical significance at the 1%, 5%, and 

10% levels, respectively, in one‐tail tests where the sign is predicted and in two‐tail tests where the sign is not predicted.

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Rule_Law Con_Corrup Gov_Eff Reg_Qual

CHG_MCAP_FGN_DEBT

All Governance

Page 47: Beneish IFRS Adoption Cross-Border Investments

Panel B:  European Union Adopters

Variable

Intercept ‐0.0190 ‐0.0202 * ‐0.0213 * ‐0.0213 * ‐0.0093

(‐1.40) (‐1.83) (‐1.62) (‐1.72) (‐0.86)

GDP_CHG + 0.0006 0.0001 0.0015 0.0025 ‐0.0058

( 0.12)  ( 0.02)  ( 0.24)  ( 0.37)  (‐0.98)

CURR_CHG_PR + / ‐ 0.0000 0.0000 0.0000 0.0000 0.0000

( 0.44)  ( 1.19)  ( 0.86)  ( 0.70)  ( 0.00) 

PCT_IFRS ‐ ‐0.0195 *** ‐0.0146 ** ‐0.0172 ** ‐0.0164 ** ‐0.0218 ***

(‐2.60) (‐1.81) (‐2.03) (‐2.10) (‐2.56)

PUBLIC_CHG + ‐0.0016 0.0000 ‐0.0016 ‐0.0021 0.0022

(‐0.51) ( 0.00)  (‐0.47) (‐0.61) ( 0.71) 

COR_STOCK_RET + / ‐ 0.0058 0.0089 0.0061 0.0057 0.0112 **

( 1.02)  ( 1.41)  ( 1.04)  ( 1.00)  ( 1.94) 

COR_GROWTH + / ‐ 0.0004 0.0006 0.0005 0.0004 0.0004

( 0.11)  ( 0.19)  ( 0.15)  ( 0.12)  ( 0.12) 

TIME_DIFF + / ‐ ‐0.0002 ‐0.0002 ‐0.0002 ‐0.0002 ‐0.0026

(‐0.53) (‐0.68) (‐0.56) (‐0.55) (‐0.74)

CURR_UNION + / ‐ 0.0031 0.0018 0.0027 0.0028 0.0024

( 1.49)  ( 0.86)  ( 1.23)  ( 1.38)  ( 1.12) 

BIL_TRADE + / ‐ 0.0014 * 0.0013 * 0.0015 * 0.0015 * 0.0005

( 1.59)  ( 1.93)  ( 1.79)  ( 1.95)  ( 0.79) 

COM_LANG + / ‐ 0.0009 0.0017 0.0013 0.0010 0.0006

( 0.44)  ( 0.82)  ( 0.66)  ( 0.56)  ( 0.32) 

TAX_TREATY + / ‐ ‐0.0003 ‐0.0008 ‐0.0004 ‐0.0005 ‐0.0007

(‐0.15) (‐0.36) (‐0.20) (‐0.23) (‐0.33)

COLONY + / ‐ 0.0027 0.0027 0.0028 0.0027 0.0021

( 1.48)  ( 1.24)  ( 1.38)  ( 1.36)  ( 0.86) 

COM_LEG_ORIG + / ‐ 0.0007 ‐0.0002 0.0002 0.0004 0.0011

( 0.47)  (‐0.14) ( 0.16)  ( 0.26)  ( 0.69) 

CHG_RULE_LAW + 0.0082 0.0331 ***

( 1.08)  ( 3.35) 

CHG_CON_CORRUP + ‐0.0105 ‐0.0234

(‐1.90) (‐4.09)

CHG_GOV_EFF + 0.0009 ‐0.0024

( 0.15)  (‐0.42)

CHG_REG_QUAL + 0.0047 ‐0.0041

( 0.60)  (‐0.40)

ADOPT + 0.0073 ** 0.0061 * 0.0065 * 0.0061 * 0.0094 ***

( 1.80)  ( 1.47)  ( 1.34)  ( 1.54)  ( 2.42) 

# OBS 451 451 451 451 532

R‐Square 0.2054 0.2171 0.1990 0.2012 0.2637

F Value 7.02 6.68 6.30 6.70 8.54

This panel reports coefficients and, in parentheses, t‐statistics for OLS regression models that explain the change in foreign investment between 2003 and 2007 for debt

investee/investor pairs for EU only IFRS adopters after including changes in country level governance. All variables are defined in Appendix A. In this panel, GDP_CHG, 

PCT_IFRS, PUBLIC_CHG, CHG_GOVERNANCE, and ADOPT are based on the investee country.  All regressions are performed with two dimensional clustered robust standard 

errors to control for both within investee and within investor correlations (Petersen 2009). ***, ** and * indicate statistical significance at the 1%, 5%, and 10% levels, 

respectively, in one‐tail tests where the sign is predicted and in two‐tail tests where the sign is not predicted.

Table 7 ‐ Cont'd

Pair Data Multivariate Regressions ‐ Governance Changes

CHG_MCAP_FGN_DEBT

Rule_Law Con_Corrup Gov_Eff Reg_Qual All Governance

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

Page 48: Beneish IFRS Adoption Cross-Border Investments

Variable

Intercept ‐0.0151 ‐0.0101

(‐1.49) (‐0.96)

GDP_CHG + 0.0018 ‐0.0036

( 0.30)  (‐0.64)

CURR_CHG_PR + / ‐ 0.0000 0.0000

( 1.51)  (‐0.04)

PCT_IFRS ‐ ‐0.0111 ** ‐0.0225 ***

(‐2.01) (‐2.50)

PUBLIC_CHG + ‐0.0029 0.0012

(‐1.16) ( 0.39) 

COR_STOCK_RET + / ‐ 0.0101 * 0.0078

( 1.78)  ( 1.54) 

COR_GROWTH + / ‐ 0.0000 0.0030

( 0.00)  ( 1.26) 

TIME_DIFF + / ‐ ‐0.0003 ‐0.0001

(‐1.27) (‐0.45)

CURR_UNION + / ‐ 0.0027 0.0040

( 1.12)  ( 1.43) 

BIL_TRADE + / ‐ 0.0010 0.0006

( 1.52)  ( 0.83) 

COM_LANG + / ‐ 0.0009 0.0007

( 0.65)  ( 0.30) 

TAX_TREATY + / ‐ ‐0.0013 ‐0.0012

(‐0.72) (‐0.56)

COLONY + / ‐ 0.0008 0.0037 **

( 0.48)  ( 2.15) 

COM_LEG_ORIG + / ‐ 0.0013 0.0008

( 0.95)  ( 0.46) 

CHG_RULE_LAW + 0.0166 ** 0.0304 ***

( 2.19)  ( 3.86) 

CHG_CON_CORRUP + ‐0.0198 ‐0.0216

(‐3.42) (‐3.92)

CHG_GOV_EFF + ‐0.0005 ‐0.0005

(‐0.07) (‐0.08)

CHG_REG_QUAL + 0.0064 ‐0.0028

( 0.72)  (‐0.29)

ADOPT* ADOPT_INVESTOR + 0.0046 * 0.0086 *

( 1.45)  ( 1.55) 

ADOPT* NON_ADOPT_INVESTOR + 0.0060 ** 0.0100 ***

( 2.08)  ( 2.50) 

# OBS 532 404

R‐Square 0.2493 0.2760

F Value 7.96 7.66

Coefficient

(t‐statistic)

Coefficient

(t‐statistic)

This panel reports coefficients and, in parentheses, t‐statistics for OLS regression models that explain the change in the source of 

foreign investment between 2003 and 2007 for debt investee/investor pairs after including changes in country level governance.  

Column 1 (2) includes All (only EU) IFRS adopters. ADOPT_INVESTOR (NON_ADOPT_INVESTOR) equals one if the investing country is 

also an adopting (non‐adopting) country and zero otherwise. All variables are defined in Appendix A. In this panel, GDP_CHG, 

CURR_CHG, PCT_IFRS, PUBLIC_CHG, CHG_GOVERNANCE, and ADOPT are based on the investee country. All regressions are performed 

with two dimensional clustered robust standard errors to control for both within investee and within investor correlations (Petersen 

2009). ***, ** and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively, in one‐tail tests where the sign is 

predicted and in two‐tail tests where the sign is not predicted.

Table 8

Pair Data Multivariate Regressions ‐ Investor Adoption

CHG_MCAP_FGN_DEBT_PR

All Adopters EU Adopters

Page 49: Beneish IFRS Adoption Cross-Border Investments

Panel A ‐ Worldwide Foreign Equity Investment

Panel B ‐ Worldwide Foreign Debt Investment

Figure 1

Worldwide Foreign Investment 

This Figure reports the 2003 annual total foreign investment flows. Panel A (B) reports the foreign Equity (Debt)

investement attracted by each country group. The data are the bilateral investment data from the Coordinated Portfolio

Investment Survey (CPIS). Country groupings are based on the country groups presented in the paper as detailed in Table 1,

where the number in parentheses after the country group represents the total number of countries in the group.

Specifically, "EU Adopting Countries" includes the 13 European Union countries in our sample countries that adopted IFRS

in 2005. "Control Countries" includes the 12 control countries used in our sample. "Other Adopting Countries" includes the

4 non‐European Union adopting countries in our sample. The group "Dropped From Sample" includes the 9 countries that

were dropped from our sample primarily because of missing data. The group "Other Small Countries" includes the 154

remaining countries in the world, the vast majority of these countries are missing the data necessary to be included in our

sample. Our calculations excludes investment flows classified by CPIS as Other Countries (Confidential Data), Other

Countries (Unallocated), International Organizations, and Cayman Islands.

Page 50: Beneish IFRS Adoption Cross-Border Investments

Panel A ‐ Changes in Worldwide Foreign Equity Investment

Panel B ‐ Changes in Worldwide Foreign Debt Investment

Figure 2

Changes in Worldwide Foreign Investment 2003 to 2007

This Figure reports the changes in total annual foreign investment flows between 2003 and 2007. Panel A (B) reports the foreign

Equity (Debt) additional investement attracted by each country group. The data are the bilateral investment data from the

Coordinated Portfolio Investment Survey (CPIS). Country groupings are based on the country groups presented in the paper as

detailed in Table 1, where the number in parentheses after the country group represents the total number of countries in the

group. Specifically, "EU Adopting Countries" includes the 13 European Union countries in our sample countries that adopted

IFRS in 2005. "Control Countries" includes the 12 control countries used in our sample. "Other Adopting Countries" includes the

4 non‐European Union adopting countries in our sample. The group "Dropped From Sample" includes the 9 countries that were

dropped from our sample primarily because of missing data. The group "Other Small Countries" includes the 154 remaining

countries in the world, the vast majority of these countries are missing the data necessary to be included in our sample. Our

calculations excludes investment flows classified by CPIS as Other Countries (Confidential Data), Other Countries (Unallocated),

International Organizations, and Cayman Islands.