| This dissertation is based on two separate essays on the adoption of international financial reporting standards (IFRS) using country level data. Essay one examines a comprehensive set of environmental characteristics based on Choi and Meek's (2005) framework of accounting system development that explains why country standard setters adopt IFRS for financial reporting on their national exchanges. A recent survey indicates that although a majority of the sample countries has adopted IFRS for their domestic listing requirements, there remain some prominent non-adopting countries. The decision to adopt provides a unique opportunity to test factors previously identified in literature as contributing to differences in financial reporting systems. The main finding indicates that factors relating to political and economic ties with other countries, i.e. globalization factors, create fairly powerful contracting incentives for adoption. Similarly, the need for capital investment evidenced by a slower economy and higher capital formation creates signaling incentives for adoption. However, there are some internal issues involving taxation and size of capital markets that produces disincentives for adoption relating to internal political and practical concerns.;Essay two investigates the consequences of adoption in countries via their effect on US investor allocation choice. Prior literature has documented a "home bias" effect in which investors hold a disproportionately larger amount of domestic stocks relative to the world portfolio. Indirect barriers, such as lack of credible and understandable information, have supplanted direct barriers as the primary cause for this imbalance. In fact the recent global trend of IFRS adoption may signal attempts by policy makers to reduce these asymmetries. However, there is a concern that these standards must be accompanied by stronger enforcement in order for them to gain legitimacy. Investor allocation choice is based on US holdings of foreign equities taken from the US Treasury Department 2004 survey. Regulatory environment is interpreted using two distinct factors: the legal standards system and the enforcement regime. The results indicate that both measures significantly increase equity holdings, and are a necessary consideration when adopting IFRS if countries want to increase their equity marketability in the US. |
