Investor Protection and the Role of Firm‐Level Financial Transparency in Attracting Foreign Investment

Abstract

We ask if companies can attract foreign equity capital by improving the transparency of their financial statements. Using a large panel of firms across 51 countries outside the United States, we show that the answer is yes, but only in countries with relatively high levels of investor protection. In countries with poor investor protection, unilaterally increasing firm‐level transparency has no effect on foreign ownership. Furthermore, our results indicate that in countries with higher levels of investor protection, the positive association between transparency and foreign ownership is stronger following a country's adoption of the International Financial Reporting Standards.

Family Ownership, Independent Oversight, and Financial Information Transparency: Evidence From Asia

“…Countries with strong investor protection are relatively low yielding transparency of information. Consistent with the results of Hansen et al (2015), the level of transparency tends to increase significantly in countries with stronger investor protection compared to countries with weaker investor protection. However, Jeanjean (2012) argue that the size of investor protection used by Houqe et al (2012) has some limitations.…”

Corporate governance and quality of financial statements: a study of listed Nigerian banks

“…This group of directors are unique because of their connections with another country, which may give room for adding new knowledge and expertise to the board. Nevertheless, they could be quite expensive because of the cost attributed to presence of the travelling expenses, distance and their non-familiarity with the nation of the firm where they are directors (Miletkov, 2013 …”

Foreign Portfolio Investment and Earnings Quality: Evidence from Sri Lanka

“…The evidence supports the hypothesis that foreign ownership participation increases the performance of firms. Moreover, while studies (MoIlah and Talukdar, 2007;Douma et al, 2002;Hansen et al, 2015) identify a positive impact from FPI to the company performance, some studies (for example, Barbosa and Louri, 2003;Khawar, 2003) identifies that there is no impact or the negative impact to the company performance.…”

“…In the same vein, it is essential to note that it is rare that previous studies have employed both macro-economic variables and the company-specific factors to investigate whether both factors determine the FPI. For example, Hansen et al, (2015) concentrated only on firm-specific factors such as US Listing, Market Capitalization, Market Index, ROA, Big N Auditor, Leverage, Dividend Yield, Controlling Shareholder, Market to Book Value, Foreign Sales and Domestic Institutional Ownership to test the firm-level transparency. The study found that the firm-level transparency is positively related to foreign ownership.…”

“…By looking at the above statistics, it is evident that the stock market activity has been highly volatile and has been driven by market sentiments as well as by the stability of the country. In view of the determinants of FPI, preceding studies have identified different factors such as; the growth rate of real GDP, real interest rate, real exchange rate, gross capital flow, market capitalization, institutional quality and trade degree of openness (Ekeocha et al, 2008;Ekeocha et al, 2012;Hansen et al, 2015). However, they have not considered the company-specific factors such as Return on Assets (ROA), Return on Equity (ROE), which means that less concentration has been paid to identify company performance and earnings quality as determinants of FPI.…”