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Accounting Standards and International Portfolio Holdings

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  • Gwen Yu

    () (Harvard Business School, Accounting and Management Unit)

  • Aida Sijamic Wahid

    () (University of Toronto, Rotman School of Management)

Abstract

Do differences in countries' accounting standards affect global investment decisions? We explore this question by examining how accounting distance, the difference in the accounting standards used in the investor's and the investee's countries, affects the asset allocation decisions of global mutual funds. We find that investors tend to underweight investees with greater accounting distance. Using the mandatory adoption of International Financial Reporting Standards (IFRS) as an event that changed the accounting standards of various country-pairs, we examine how two sources of changes in accounting distance - (i) change due to IFRS adoption of the investee and (ii) change due to IFRS adoption in the investor's country - affect global portfolio allocation decisions. We find that the tendency to underinvest in investees with greater accounting distance significantly weakens when accounting distance is reduced either from an investee's IFRS adoption or from IFRS adoption in the investor's country. The latter finding holds despite the fact that IFRS adoption in the investor's country had no impact on the accounting standards under which the investee firms present their financial information; the only change is in the investor's familiarity with these standards. This suggests that differences in accounting standards affect investor demand by imposing greater information-processing cost on those less familiar with the reporting standards.

Suggested Citation

  • Gwen Yu & Aida Sijamic Wahid, 2014. "Accounting Standards and International Portfolio Holdings," Harvard Business School Working Papers 14-059, Harvard Business School.
  • Handle: RePEc:hbs:wpaper:14-059
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    References listed on IDEAS

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    1. Portes, Richard & Rey, Helene, 2005. "The determinants of cross-border equity flows," Journal of International Economics, Elsevier, vol. 65(2), pages 269-296, March.
    2. Stijn Van Nieuwerburgh & Laura Veldkamp, 2009. "Information Immobility and the Home Bias Puzzle," Journal of Finance, American Finance Association, vol. 64(3), pages 1187-1215, June.
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    Cited by:

    1. De George, Emmanuel T. & Li, Xi & Shivakumar, Lakshmanan, 2016. "A review of the IFRS adoption literature," LSE Research Online Documents on Economics 67599, London School of Economics and Political Science, LSE Library.
    2. repec:ers:ijebaa:v:iv:y:2016:i:4:p:3-16 is not listed on IDEAS
    3. Emmanuel T. De George & Xi Li & Lakshmanan Shivakumar, 2016. "A review of the IFRS adoption literature," Review of Accounting Studies, Springer, vol. 21(3), pages 898-1004, September.
    4. Kim, Incheol & Miller, Steve & Wan, Hong & Wang, Bin, 2016. "Drivers behind the monitoring effectiveness of global institutional investors: Evidence from earnings management," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 24-46.
    5. repec:eee:reacre:v:28:y:2016:i:1:p:22-41 is not listed on IDEAS
    6. repec:aud:audfin:v:15:y:2017:i:146:p:218 is not listed on IDEAS
    7. repec:eee:jaecon:v:65:y:2018:i:2:p:237-269 is not listed on IDEAS

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