Accounting Standards and International Portfolio Holdings: Analysis of Cross-border Holdings Following Mandatory Adoption of IFRS

Prior literature shows that investors under-invest in foreign firms due to information asymmetry problems. I posit that differences in local accounting standards are a source of the information asymmetry among investors. Using security-level holdings of international mutual funds, I find that harmonizing accounting standards (adoption of IFRS) increases foreign mutual fund holdings. Harmonizing accounting standards increases cross-border holdings 1) directly by reducing the information processing cost of foreign investors and 2) indirectly by reducing the effect of other barriers on cross-border investments such as geographic distance. Further analysis suggests that harmonization across regimes is a more effective means to attract foreign capital than a unilateral improvement in a country’s reporting regime. I thank my dissertation chair, Russell Lundholm, for his continuous guidance and members of my dissertation committee, Ilia Dichev, Greg Miller, Venky Nagar, Tyler Shumway, and Jing Zhang for their thoughtful comments and suggestions. I also thank Phil Berger (Editor), Bjorn Jorgensen, Nemit Shroff, Don Yu, an anonymous referee, and seminar participants at the University of Michigan for their helpful feedback on the paper. I gratefully acknowledge financial support from the Center of International Business and Education, the Deloitte Foundation, Harry H. Jones Endowment Fund, and the Paton Accounting Fellowship. All errors are my own.