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

Abstract

We examine the benefits of accounting comparability for cross-border investments in private firms. Exploiting a quasi-experimental setting, we examine the effect of an increase in accounting comparability using a difference-in-differences research design. We find that increases in accounting comparability after a major accounting reform leads to an average increase in foreign ownership of about 2 to 6 percent. Cross-sectional and industry results confirm that the effect is stronger for smaller, highly profitable, intangible-intensive, and more stable firms that are in the consumer durables and manufacturing industries. The findings are robust to alternative matching procedures, various measurement windows, and a placebo-test. Our large sample evidence based on private firms provides insights on the effects of increasing the comparability of local GAAP for foreign-direct investments in private firms. Additionally, our findings are relevant to standard setters as countries converge towards and endorse International Financial Reporting Standards and update their local GAAP.