Accounting policy choices and home-nation investment bias: A cross-country analysis
Does familiarity, as the ancient Roman proverb suggests, breed contempt? Or, following the precepts of modern psychology, does familiarity lead to liking? There is a significant body of empirical research which asserts that firms making fundamental accounting policy choices are able to reduce information asymmetry and enhance financial statement credibility by selecting methods more familiar to their target investing population. It is not known whether this general outcome regarding investing behavior obtains in all cases or is particularized to single-jurisdiction scenarios. Our understanding of cross-border financing arrangements would benefit from additional understanding of this phenomenon. This research examines variations in accounting policies of non-U.S. companies that use the American Depositary Receipt (ADR) system to list securities in the U.S. The focus here is on measurement of institutional investors’ increased international portfolio diversification that may be engendered by accounting policy choices.
Prior research comparing accounting choices by companies in different countries has found, generally, that firms choosing recordation-reporting-disclosure techniques more closely aligned with U.S. generally accepted accounting principles (GAAP) gain traction through a higher level of non-domestic institutional investment. Companies prefer wide attraction for their securities as an enabling method for financing; institutional investors prefer foreign company investment as a way to gain value through diversification and/or reduction in country- and regional-level risk. This research reports on a comparative analysis showing that GAAP compliance leads to higher levels of institutional investment ownership. Familiarity, it seems, not only fosters investment, it encourages it.