The Impact of Mandatory IFRS Adoption on Foreign Mutual Fund Ownership: The Role of Comparability

Proponents of International Financial Reporting Standards (IFRS) claim that mandating a uniform set of accounting standards improves financial statement comparability that in turn attracts greater cross-border investment. Our study tests this assertion by examining the change in foreign mutual fund investment in IFRS users following the mandatory adoption of IFRS in the European Union (EU) in 2005. We predict that mandatory IFRS adoption improves comparability only in countries with credible implementation, and that the improvement is stronger for companies experiencing larger increases in uniformity (where increased uniformity is defined as an increase in the number of industry peers using the same accounting standards). We support our prediction by finding that foreign mutual fund ownership increases following mandatory IFRS adoption only in countries with strong implementation credibility, and that the increase is greater in companies with larger increases in uniformity. Acknowledgments: We thank the following for their helpful comments: Mary Barth, Bill Beaver, Wayne Landsman, and workshop participants at National University of Singapore, Santa Clara University, the University of Southern California, the University of Oregon, and the 2009 Stanford Summer Camp. Siqi Li acknowledges the support of the Presidential Research Grant from Santa Clara University.