The effect of the adoption of International Financial Reporting Standards on foreign portfolio investment in Africa

Abstract

1994 to 2015 on total foreign portfolio investments in liabilities (equity and debt) were collected.Panel data regression analysis incorporating pooled regression, fixed-effects, and random-effects models was estimated. Also, the generalised method of moment estimator was employed to address the problem of endogeneity, usually associated with panel data analysis and as a robustness check for the model. The logit regression model was used to examine the determinant factors of IFRS adoption.Various statistical tests were estimated, such as the diagnostic test, using the histogram and Jarque-Bera statistics, difference-in-difference (DID) test, the unit root test, and the cross-sectional dependence test. The Hausman's chi-square was estimated to determine the best alternative technique between the fixed-effects and random-effects models. Also the Arellano-Bond estimator autocorrelation 〈1〉 and 〈2〉 was used to evaluate the validity of the variable instruments in the model. Besides, the average marginal effect (AME) was estimated for the effect of each covariate on the result. Certain covariates were estimated as control variables in the model.The statistical results show a significant and positive effect of the adoption of IFRS on FPI inflows after the adoption and implementation of IFRS in adopting countries. Equally, the finding further indicates a significant difference in the volume of FPI inflows after the adoption of IFRS than before the adoption, in adopting countries. The statistical estimates also reveal a positive and significant effect of IFRS adoption on FPI in adopting countries, compare with non-adopting IFRS countries where it shows a negative and non-significant relationship. It shows that countries that adopted IFRS experience more inflows in FPI compare with the non-adopting countries in Africa.Furthermore, the logit regression results show that culture, the legal system, political system, investor protection, market capitalisation, and tax were found to be positively significant with the probability of adopting IFRS in the logistic model. This thesis, therefore, suggests that the adoption of IFRS is justified in the selected countries in Africa since the results indicated a positive and significant effect of IFRS adoption on FPI in these countries. Hence, substantiated the assumption of IFRS proponents that adoption will enhance the flow of FPI in adopting countries for economic development. Policies measure to monitor the activities of listed firms and to enforce compliance with IFRS rules and regulations are warranted.These policies would further enable IFRS adopting countries to enhance more flow of FPI.

IFRS and FPI nexus: does the quality of the institutional framework matter for African countries?

“…The study's results show the extent of the explanatory power of IFRS adoption in influencing the flow of investment in the adopting countries. This is consistent with the findings of Beneish et al (2015) and Omotoso et al (2022) that the adoption of IFRS will positively influence the flow of FPI in the adopting country. Moreover, in this study, the same positive effect is realised on the lagged value of FPI.…”

“…The results suggest that if a country has a poor ROL index in the post-adoption period, it negatively impacts the flow of FPI. Such negative effects lend support to previous studies (Akpomi and Nnadi, 2017;Nnadi and Soobaroyen, 2015;Omotoso et al, 2022). It shows that FPI thrives in an environment where the rule of law is respected and adhered to, where the government itself respects the rule of law and the constitution of the land.…”

“…Where FPI it : is the total foreign portfolio investment deflated by the GDP of a country i at a time, t; GDPG it is the gross domestic product growth for country i at time t; REER it is the real effective exchange rate of country i at time t; TOGDP is trade openness as a percentage of GDP of a country i at time t; POS it is the political stability index of country i at time t; ROL it is the rule of law index for country i at time t; COC it is the control of corruption index of country i at time t; HRVT it is the transparency index for country i at time t; Institutional it is a composite variable for country i at time t; Historical it is a composite variable for country i at time t and IFRSadopt is a dummy variable with 1 for the post adoption period and 0 for the pre-adoption period for country i at time t. This study similar to Omotoso et al (2022), and others, applies the GMM proposed by Blundell and Bond (1998) to estimate model 1 and model 2. The GMM estimator utilises all available moment conditions by combining moment conditions for the model in the first differences and moment conditions for the model in levels.…”

“…The capital market benefits arise from the nature of IFRS (compared to GAAP) and the use of common standards by firms from different countries, which improves the comparability of information for international investors and analysts. In a recent study by Omotoso et al (2022), the authors document evidence of increased FPI after adopting IFRS, citing that IFRS enhances the usefulness of accounting information by making it more reliable, transparent, and comparable. After adoption, the most cited benefits in these studies have been the reduction in information asymmetry and the cost of capital, which has greatly improved the cross-country investments.…”

International Financial Reporting Standards Adoption, Investor Protection, and Foreign Portfolio Investment: A Review

“…Authors argue that the increase in FPI is driven by the investor's familiarity with reporting standards. Similarly, Omotoso, Schutte, and Oberholzer (2021) suggest that the adoption of IFRS increases FPI in African countries. These outcomes imply that adopting IFRS in a country enables domestic investors to familiarize themselves with accounting standards of more countries, help reduce investors' information processing costs, and eventually increase FPI.…”