Accounting Reforms and Foreign Portfolio Investment in China: An Empirical Investigation

The relationship between foreign portfolio investment (FPI) and various macroeconomic variables of China has been discussed in the existing literature. However, the link between China’s accounting reforms and FPI is yet to be explored. This study intends to discover the impact of changes in China’s accounting system and convergence of its domestic accounting standards (henceforth referred to as accounting reforms) on FPI. We have used Binary Choice Model in Eviews for two decades’ data. In our analyses, FPI has been taken as dependent variable, whereas accounting reforms, annual increase in listed companies, GDP growth of China and financial crises are taken as explanatory variables. The results of our model reveal a significant relationship between accounting reforms and FPI; moreover, Granger causality test shows a significant causal relationship between yearly increase in listed companies and FPI. Our findings are theoretically rational and can be useful for both investors and the policymakers.