FRS and the regulatory environment: The case of U.S. investor allocation choice

This paper investigates whether a country's use of international financial reporting standards (IFRS) is associated with increased US investment in foreign equities. The recent global trend towards the use of IFRS may signal attempts by policy makers to reduce information asymmetries for intern...

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Bibliographic Details
Published in:Journal of accounting and public policy 2011-10, Vol.30 (5), p.481
Main Authors: Shima, Kim M, Gordon, Elizabeth A
Format: Article
Language:English
Subjects:
Enforcement
International finance
International Financial Reporting Standards
Securities regulations
Studies
Online Access:Get full text
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Summary:This paper investigates whether a country's use of international financial reporting standards (IFRS) is associated with increased US investment in foreign equities. The recent global trend towards the use of IFRS may signal attempts by policy makers to reduce information asymmetries for international investors. However, a concern is that these standards must be accompanied by a stronger regulatory environment in order for them to gain legitimacy. Investor allocation choice is based on US holdings of foreign equities and the regulatory environment is interpreted using two distinct factors: the legal standards system and the enforcement regime. We document that US investment is associated with IFRS only when it is combined with a strong regulatory environment, specifically a strong enforcement regime. We also find that mandating IFRS is attractive to US investors only when combined with a strong regulatory environment. [PUBLICATION ABSTRACT]
ISSN:0278-4254
1873-2070