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ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude

to my teacher DR.ASHWANI HA!!A who ga"e me

the golden opportunity to do this wonderful pro#ect on

the topic $WH% A&&'(N)IN* AND R+,'R)IN*

S)ANDARDS A) IN)+RNA)I'NA! !+-+!/ which

also helped me in doing a lot of research and i came

to know a0out so many new things I am really

thankful to him.Secondly i would also like to thank my parents and

friends who helped me a lot in finali1ing this pro#ect

within the limited time frame.

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Abstract

In a sample of 102 non -European Union countries, we study variations in the decision to adopt

International Financial Reporting tandards !IFR"# $here is evidence that more powerful

countries are less li%ely to adopt IFR, consistent with more powerful countries &eing less

willing to surrender standard -setting authority to an international &ody# $here is also evidence

that the li%elihood of IFR adoption at first increases and then decreases in the 'uality of

countries( domestic governance institutions, consistent with IFR &eing adopted when

governments are capa&le of timely decision ma%ing and when the opportunity and switching cost

of domestic standards are relatively low# )e do not find evidence that levels of and e*pected

changes in foreign trade and investment flows in a country affect its adoption decision+ thus, we

cannot confirm that IFR lowers information costs in more glo&alied economies# onsistent

with the presence of networ% effects in IFR adoption, we find that a country is more li%ely to

adopt IFR if its trade partners or countries within in its geographical region are IFR adopters#

#

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Today, everything in the world comes closer than ever before. Things are harmonizing and people

learn to think and act global.

And indeed, you can see that in every step you makeyou can shop the same items anywhere in

the world, you can get the same food in McDonalds anywhere in the world, you can even fly

anywhere in the world in less than 24 hours.

Accounting and financial reporting are no exception. This is where IFRS has its own spotit will

serve as unified set of principles for financial reporting anywhere in the world.

Introduction

$he International .ccounting tandards /oard !I./" was esta&lished in 2001 to

develop International Financial Reporting tandards !IFR"# . year later, European Union !EU"

mem&er states committed to re'uiring IFR for all listed corporations in their urisdictions

effective year 200 !E, 2002"# $he first IFR was issued in 200, &y which time at least 13

countries re'uired compliance with the international standards# ince then, nearly 40 countries

!including EU countries" have mandated IFR for all listed companies# Further, a&out 2

countries have either mandated IFR for some listed companies or allow listed companies to

voluntarily adopt IFR# 5owever, as of 2004, at least 60 countries continue to re'uire

domestically developed accounting standards over IFR, and this list includes some large

economies li%e /rail, anada, hina, 7apan, India, and the U#1)e investigate why there is

heterogeneity in countries( decisions to adopt IFR8 in other words, why some countries adopt

IFR while others do not# Understanding countries( adoption decisions can provide insights into

the &enefits and costs of IFR adoption#

In other words, countries do not adopt IFR all at once, and the o&served inter-temporal

increase in IFR adoption across countries can &e due to the growing value of the IFR

9networ%#: )e focus our analysis of networ% effects at the regional and trade levels#

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.ccordingly, we test whether the li%elihood of

1 everal of these countries have committed to adopting !9converging with:" IFR at some future date# For thepurpose of our analyses, we do not consider a country to have adopted IFR until listed companies in its urisdictionare in fact re'uired to report under IFR# For e*ample, in 2006, .l&ania committed itself to re'uiring IFR effective7anuary 1, 200;8 the adoption date was su&se'uently moved to 7anuary 1, 200


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IFR adoption for a given country in a given

year increases with the num&er of IFR

adopters in its geographical region and with

IFR adoption among its trade partners#

Economic networ% theory predicts that in addition to networ% &enefits !synchroniation

value", a product with networ% effects can &e adopted due to its direct &enefits !autar%y value"

!=at and hapiro, 13ie&owit and ?argolis, 1336"# In the case of the IFR adoption

decision &y a country, we argue the direct &enefits are represented &y &oth the net economic

and net political value of IFR over local standards#

$he net economic value of IFR is intended to capture direct pecuniary &enefits as they

are usually conceived in economic models of networ%s# @roponents of IFR argue that the

standards reduce information costs to an economy, particularly as capital flows and trade

&ecome more glo&alied+ it is cheaper for capital mar%et participants to &ecome familiar with

one set of glo&al standards than with several local standards !>eu, 2008 /arth, 200


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international accounting standard setting+ if IFR standard setting can &e influenced &y political

lo&&ying, more powerful countries are more li%ely to &e a&le to shape IFR# $he prevailing

position of the EU in IFR standard setting, however, can override this argument# If countries

e*pect the EU to have a dominant role in I./ affairs !/rac%ney and )itmer, 200", they are

li%ely to have to cede some authority over standard setting to EU interests# eding authority

over local standards is, in turn, li%ely to &e less palata&le to more powerful countries, which

leads to the prediction that more powerful countries are less li%ely to em&race IFR#

In addition to standard-setting power, cultural sensitivities can also affect the net political value

of IFR to a country# If the I./ is perceived as a European institution, countries that are

culturally more distant from Europe are li%ely to &e less accepting of IFR !Bing et al#, 2008

iesiels%i, 20048 and Corris, 2004"# $hus, we also test whether cultural differences can e*plain

cross-sectional variation in IFR adoptionIn addition to the macro-level economic and political

factors discussed earlier, it is li%ely that a country(s decision to adopt IFR is influenced &y its

internal politics+ e#g#, the actions of special-interest lo&&yists and ideology-driven regulators# It

is difficult to specify the nature of such within-country politics in a large sample of countries, let

alone measure it with a reasona&le degree of accuracy+ only in more transparent societies li%e

the United tates is such an e*ercise possi&le# $o the e*tent that the effects of internal politics

on IFR adoption are systematically associated to those of the macro-level determinants we

study, the associations documented in our empirical tests can have alternate interpretations#

5owever, we are not aware of any theory that predicts such a systematic association#

Dn networ% effects, the data reveal evidence of regional trends in IFR adoption, i#e#, a

country is more li%ely to implement IFR if other countries in its geographical region are IFR

adopters# )e also find evidence that a country is more li%ely to adopt IFR if its trade partners

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are IFR adopters# $he result is significant for at least two reasons+ !1" it suggests countries

internalie the networ% effects of IFR in their adoption decisions8 and !2" it suggests that as the

networ% &enefits from IFR get large, countries may adopt the international standards even if the

direct &enefits from such standards are inferior to those from locally developed standards#

Dn economic determinants of IFR adoption, we find no evidence that the level of and

e*pected changes in foreign investment and trade affect the li%elihood of adoption# $hus, we

cannot confirm that IFR lowers information costs in more glo&alied economies# )e do find,

however, evidence that the li%elihood of IFR adoption at first increases and then decreases in

the 'uality of countries( domestic governance institutions# $hat 'uality is measured using a

factor that e*tracts common variation from a set of pro*ies measuring the process and output of

countries( governance systems !including, an economic democracy inde* and citien wealth"#

$he result on governance 'uality can &e interpreted as consistent with &oth the most poorly

governed countries &eing less responsive to international standards, and all other countries

conditioning their IFR adoption decisions on the opportunity and switching costs of domestic

governance standard

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$here is also evidence that political considerations affect IFR adoption decisions# )e find

that more powerful countries are less li%ely to adopt IFR, consistent with more powerful

countries &eing less willing to surrender standard-setting authority to the I./# ountry-level

power is measured as the first principal component of a set of pro*ies for countries( a&ilities to

influence international decision ma%ing !including their sie and popularity within the United

Cations"# In contrast to the results on power, we do not find evidence of countries( cultural

closeness to the EU influencing their IFR adoption decisions, where more hristian countries

and countries with long-settled colonial relations with EU powers are considered culturally

closer to the region#

.cademic theories yield mi*ed predictions on whether the adoption of IFR is &eneficial

to a country# ome scholars have argued that international harmoniation in accounting can

improve capital-mar%et efficiency+ a common set of international accounting standards can

reduce the information processing and auditing costs to mar%et participants !/arth, 20048 200


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$he e*isting empirical literature on IFR has focused largely on the determinants and

conse'uences of IFR adoption at the firm level# $he firm-level studies are conditional on

countries( decisions to allow or mandate IFR, suggesting that studies of IFR adoption at the

country-level can complement firm-level studies# . study &y 5ope et al.!200;" provides some

preliminary evidence on country-level IFR adoptions through 200 in a sample of < countries

!including 16 EU countries"# $heir evidence suggests countries with wea%er investor protection

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and more easily accessi&le financial mar%ets are

more li%ely to adopt IFR# )e e*pand the

country-level analysis to a more comprehensive

sample of 102 non-EU countries, and develop

and test a num&er of new factors that can affect

IFR adoption, including political power,

opportunity and switching costs, and networ%

effects# $he inclusion of networ% effects is

particularly useful in that it augments hypotheses

on cross-sectional variation in IFR adoption

with an e*planation for the o&served inter-

temporal increase in IFR adoption across

countries#

)e caution against a &road interpretation of the results in this paper in the conte*t of any

ongoing policy de&ate on IFR adoption# $here are two reasons for this caveat and they are

outlined more thoroughly in the conclusion# In &rief, the caveat is associated with+ !1" concerns

over 9modifications: to IFR at the country level !countries claim to have adopted IFR, &ut in

practice adopt the standards with restrictions"8 and !2" the li%ely increasing importance of

networ% &enefits !over direct economic and political factors" in determining IFR adoption as

more countries adopt the international standards#

$he rest of this paper is organied as follows# tarting from the economic theory of

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networ%s, section two develops hypotheses on why countries choose to adopt IFR# ection three

descri&es our data and develops pro*ies for the IFR-adoption determinants discussed in section

two# ection four provides descriptive statistics and univariate evidence on the determinants of

IFR adoption# ection five develops multivariate regression-&ased models for country-level IFR

adoption and presents results of the multivariate tests# ection si* concludes#

Theory and hypothesis development

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2.1. The economic theory of networks

$he decision to adopt IFR can &e analyed as a decision to adopt a product with networ%

effects# $o see this, note that a standard li%e IFR is li%ely to &e more appealing to a country if

other countries choose to adopt it as well# $his suggests we can use insights from the economic

theory of networ%s to develop hypotheses on why countries choose to adopt IFR#

Cetwor% theory suggests that there are generally two factors to consider in adopting

networ%-dependent products+ the intrinsic value of the product and the value of the product(s

networ% !=at and hapiro, 13ie&owit and ?argolis, 133;"# $he e*istence

of the synchroniation value of a product suggests that the product can

&e adopted even if its autar%y value is inferior to that of a su&stitute

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product !some frustrated )indows users can testify to this"# $he

synchroniation value of a product is also %nown as the value from

networ% effects#

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$he economics literature on networ%s also ma%es the distinction &etween direct and indirect

networ% effects !=at and hapiro, 13


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2.2. Applying the economic theory of networks to country-level IFRS aoption

If IFR is considered a networ%-dependent product, then a country(s decision to adopt

IFR can &e viewed through the lens of autar%y and synchroniation values# $he autar%y value

of IFR is the direct value to the adopting country from using the I./-developed accounting

standards# $he synchroniation value is the value derived from adopting a &ody of accounting

standards that is widely used &y other countries#

Aiven the networ% framewor%, a country(s decision to adopt IFR can &e e*pressed as

follows#

.dopt IFR if and only if+

.utar%y alue of IFR ynchroniation alue of IFR

G alue of >ocal A..@ H !1"

In our analysis of the autar%y value of IFR, we classify the potential direct &enefit as

arising from economic and political factors# $he economic determinants of autar%y value are

intended to capture direct pecuniary &enefits as they are usually conceived in economic models of

networ%s# $he political determinants are included to test whether adopters consider the &enefits

arising from the potentially political nature of international accounting standard setting#

7ust as the autar%y value of IFR can &e classified into economic and political &enefits,

the value of local A..@ can &e so classified# $he economic value of local A..@ refers

e*plicitly to the a&ility of e*tant accounting standards to facilitate the efficient allocation of

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capital in an economy# $he political value of local A..@ refers to political &enefits from having

local authority over standard setting# Arouping together the economic !political" &enefits of IFR

with the economic !political" &enefits of local A..@, we can rewrite e'uation !1" as follows#

.dopt IFR if and only if+

Cet Economic alue of IFR Cet @olitical alue of IFR ynchroniation alue of IFR

G 0 H !2"

)e discuss the terms in e'uation !2" in greater detail in ection 2## $he inclusion of political

determinants in the e'uation a&ove is distinct to our setting# In all theoretical models of

networ%-dependent products we are aware of, the product is usually a consumer good where

political lo&&ying for product specification is unli%ely to &e a maor issue# For e*ample, in the

earlier case of a user(s decision to &uy a ?ac, the political determinants of autar%y would

capture the potential &enefit to a user from &eing a&le to lo&&y for future features on ?acs#

Unless the user is a consumer with su&stantial mar%et power !e#g#, the federal government", such

political &enefits are unli%ely to &e of concern#

In the conte*t of e'uation !2" and our earlier discussion on networ% theory, it is useful to

note the following two points# First, a country can adopt IFR even if the economic &enefits

from such standards are inferior to those from locally developed A..@# econd, evidence that

synchroniation-value pro*ies e*plain the IFR adoption decision is consistent with countries

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internaliing the networ% effects of IFR !i#e#, networ%-effects in IFR adoption are not

networ% e*ternalities"# /oth points a&ove have implications for whether IFR is &eing adopted

for its innate 'uality or for potential networ% effects#

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2.!. "hy o countries aopt IFRS#

In this su&-section, we develop the arguments for and against IFR adoption in the

conte*t of the framewor% in e'uation !2"# Dur analysis focuses on IFR as developed and

sponsored &y the I./ starting 2002, and specifically e*cludes International .ccounting

tandards promulgated &y the I./(s predecessor, the International .ccounting tandards

ommittee !I."# $his is &ecause there is evidence to suggest that I. standards are

culturally 'uite different from IFR# In particular, while the I./(s standards are influenced &y

@an-European accounting traditions !as discussed shortly", the I.(s wor% was perceived as

more .nglo-centric# $he I. was esta&lished in 134, the year the U= oined the European

ommunity# /enston et al.!200;, p# 223" argue that &y this time, e*isting European ommunity

countries had made significant progress towards accounting harmoniation, and the I. was

created to help the U= have a voice in future cross-country standardiation#

.s noted in the introduction, we develop our hypotheses around the IFR adoption

decisions of non-EU countries# )e e*clude the EU mem&er states from our tests &ecause their

decision to adopt IFR was closely tied to the esta&lishment of the I./ itself !E, 2000"#2

2amfferman and eff !2004, p# 61" descri&e the European ommission(s approval of the reorganiation of the

I. into the I./+ they 'uote the ommission as saying that the reorganiation was 9a vote of confidence:!I., 2000, p# 3" and 9driven &y a clear determination to ma%e Jinternational accounting standardsK of the

highest 'uality !E, 2000, L 3"#:

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?oreover, the EU mem&er states committed

ointly to adopting IFR !E, 2002" ma%ing an

analysis of their individual adoption decisions

infeasi&le# Finally, there is evidence that the

development of institutions and practices of the

I./ are made in consultation with the EU#

In su&se'uent univariate tests, we provide

evidence on the differences &etween EU

countries and the rest of our sample along

adoption determinants identified &elow#

2.!.1. $et economic value of IFRS

)e descri&e the net economic value of IFR to a country as arising out of two factors+

!1" the value from having a shared &ody of accounting standards8 and !2" the relative 'uality of

local governance institutions# )e discuss these two factors in greater detail &elow#

The value from having a share %oy of accounting stanars+ IFR are developed

specifically for wide international use# @roponents of IFR argue that &y adopting a common

&ody of international standards, countries can e*pect to lower the cost of information

processing and auditing to capital mar%et participants !/arth, 20048 200


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If the adoption of IFR is e*pected to lower information costs to capital mar%ets, we

e*pect countries more dependent on foreign capital and trade to value these economic

&enefits more# .&sent international accounting standards, foreign investors must incur costs

of &ecoming familiar with domestic accounting practices# $hese costs are li%ely to &e passed

on !at least in part" to the investment-destination country# If adopting IFR is e*pected to

lower such costs, then we can e*pect countries that are dependent on foreign capital to do so#

imilarly, countries where foreign trade is an important part of the economy can &e e*pected

to adopt IFR# Related to the point a&ove, it can &e argued that countries choose to adopt

IFR when they e*pect to increase the share of foreign capital and trade in their economy+

e*pected foreign involvement in an economy can ma%e current adoption of international

For e*ample, the I./, in the wa%e of declining financial mar%ets in 200eone, 200


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standards more attractive# In this sense, even countries with low levelsof foreign capital

and trade can choose to adopt IFR if they are e*pectinggrowthin those factors#

.dopting IFR to lower information costs is conceptually distinct from adopting IFR

due to its 9networ% &enefits#: onceptually, 9networ% &enefits: refer to idea that IFR

&ecomes more appealing as more countries adopt it !see ection 2##"8 whereas adopting

IFR to lower information costs refer to the standards( potential 9platform &enefits#:6

The relative &uality of local governance institutions+ )e e*pect the relative 'uality of local

accounting standards to &e an important determinant in the decision to adopt IFR# >ocal

accounting standards are part of a comple* system of governance institutions that include

auditor training, auditing standards, enforcement !regulatory and udicial", precedent for the

protection of property rights, government corruption, and the role of the press, among others

!e#g#, /all et al., 20008 >eu et al., 2008 )atts, 2008 and /all, 200;"# $hus, in studying the

IFR adoption decision, we consider ointly the relative 'uality of local accounting standards

and that of associated governance institutions# .dopting IFR can &e costly if these

institutions are collectively not compati&le with the international standards# $he relative

'uality of e*tant governance institutions refers to the a&ility of these institutions to facilitate

the efficient allocation of capital in an economy#

In countries where the 'uality of e*tant governance institutions is relatively high, IFR

adoption is li%ely to &e less attractive# 5igh 'uality institutions represent high opportunity

and switching costs to adopting international accounting standards# $he opportunity costs

arise &ecause in adopting IFR, countries forgo the &enefits of any past and potential future

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innovations in local reporting standards specific to their economies# IFR, &y definition, are

the result of an international political economy e'uili&rium, and thus cannot &e e*pected to

provide reporting standards that are uni'uely suited to any given country(s circumstances

!>eu and )ysoc%i, 200


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For countries where local governance institutions are not well developed, the prediction

on IFR adoption is more nuanced# Dn one hand, opportunity and switching costs in these

countries are lower, so the chance to adopt an e*ternally developed &ody of accounting

standards presents an advantage# Dn the other hand, such countries are li%ely to suffer from

corrupt, slow-moving, or ineffectual governments that are resistant to or incapa&le of change

!>a @orta et al., 1333"# .t the e*treme, countries with wea% institutions are failed states,

where the adoption of IFR is unli%ely to &e of any interest or conse'uence !e#g#, $ali&an-

ruled .fghanistan or omalia"# $hus, among countries with less developed institutions, the

decision to adopt IFR is li%ely to &e driven &y lower opportunity and switching costs only if

such countries are in fact capa&le and willing to ma%e cost-&enefit tradeoffs#

2.!.2. $et political value of IFRS

$he adoption of IFR &y a country also involves trading off the potential gain from

&eing a&le to influence international standard setting against the value lost from surrendering

local authority over accounting standards# )e descri&e the tradeoffs &etween these &enefits and

costs as constituting the net political value of IFR to a country# )e classify the net political

value as arising from two factors+ !1" international power politics8 and !2" culture politics#

International power politics+'eteris pari%us, we would e*pect more powerful countries to

have a larger positive political value since more powerful countries are more li%ely to &e a&le

to influence the nature of international standards# $he influence of powerful countries can &e

the result of e*plicit lo&&ying and pressure tactics or the result of the I./ implicitly

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catering to powerful interests when developing standards#

$he dominant position of the EU in IFR standard setting presents, however, an

important constraint that is li%ely to alter the prediction a&ove# .s noted earlier, the

development of IFR is strongly lin%ed to support from the EU# $he I./ is physically

situated within the EU, and to date, the EU remains the I./(s largest sponsor !I./,

200


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costly political wrangling with the EU# Faced with this choice, it is reasona&le to e*pect that

more powerful countries are less li%ely to adopt IFR# Dn the other hand, for less powerful

countries, there is little political face lost in adopting EU-centric standards# $hus, ceteris

pari%us, we can predict that less powerful countries are more li%ely to adopt IFR#

'ulture politics+ In addition to country-level power politics, the perception of IFR as a

European institution is li%ely to affect the international standards( acceptance in a country !Bing

et al#, 2008 iesiels%i, 20048 Corris, 2004"# In countries that are culturally more accepting of

European institutions, international accounting standards can &e more politically feasi&le# In

countries where European institutions are non-native, adoption of IFR can &e viewed as

a&rogating authority to a European standard-setter# $hus, ceteris pari%us, we predict countries

that are culturally closer to Europe are more li%ely to adopt IFR#

2.!.!. Synchroni(ation value of IFRS

$he synchroniation value of IFR refers to the %ey idea in networ% theory+ that a

networ%-dependent product &ecomes more appealing as more countries adopt it# In testing for

networ% &enefits, we test for the effects of regional trends in IFR adoption# )e define regions

around continental and su&-continental geographies !.ppendi* ."# If countries within a region

are influenced &y each others( actions, we can e*pect the li%elihood of IFR adoption for a given

country to increase as the num&er of IFR adopters in that region increases# .s an additional test

of networ% &enefits, we e*amine whether the li%elihood of IFR adoption for a given country

increases in the proportion of its trade partners that are IFR adopters#

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Data and proxies

!.1. )eveloping the ataset

In this su&-section, we descri&e the construction of our data&ase of non-EU countries and

their IFR adoption status# Dur data selection procedures are aimed at generating the

widestpossi&le coverage of countries and their adoption status given data re'uirements for

dependent and independent varia&les# Dur dependent varia&les are the IFR adoption decision

and, where appropriate, the year of adoption# $hese data are collected from numerous sources

including, Beloitte(s I.plus#com we&site, correspondence with country managing partners of

&ig-6 audit firms, we& searches of newswire archives, and )orld /an% country reports# Dur

independent varia&les are the pro*ies for the various IFR adoption determinants descri&ed in

the previous section# $he pro*ies are descri&ed in the following su&-section#

$o construct our data&ase of non-EU countries and their IFR adoption status, we start

with Beloitte(s I.plus#com we&site !accessed 7uly , 200


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product !AB@" data !1 urisdictions" in 2001# $he )orld /an%(s )orld Bevelopment Indicators

!)BI" data&ase is our source for AB@ data#

$he data selection procedure descri&ed a&ove yields a final sample of 102 countries# $he

countries are listed in .ppendi* .# .s discussed, we o&tain the IFR adoption decision from

Beloitte(s I.plus#com we&site# $his we&site does not, however, report the year of IFR

adoption# $o o&tain adoption-year data, we rely on three different methods+ correspondence with

country managing partners of &ig-6 audit firms, we& searches of newswire archives, and )orld

/an% country reports# For every country listed as having adopted IFR on I.plus#com, we

contact the country managing partner of a &ig 6 audit firm with an office in that country

re'uesting data on the date of IFR adoption# .dditionally, we conduct electronic searches of

newswire archives for press articles descri&ing a country(s adoption of IFR# Finally, we

reference the )orld /an%(s country reports on o&servance of standards and codes+ these reports

occasionally detail IFR adoption dates#

$he three au*iliary sources descri&ed a&ove ointly yield adoption-year data for every

country listed &y I.plus#com as having adopted IFR# In a few cases, data from a country

managing partner of a &ig 6 audit firm or data from the )orld /an% country reports disagree with the

I.plus#com data on the country(s adoption status itself# For e*ample, Egypt and @eru were listed on

I.plus#com as re'uiring IFR for all listed companies, &ut at least one !non Beloitte" &ig 6 audit

partner in each country disagreed+ the partners argued that IFR was not permitted in those

countries# In these circumstances, we err in favor of the &ig 6 audit partnerM )orld /an% country

report#

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$he disagreement &etween even &ig 6 audit firms on the nature of IFR adoption in some countries

suggests that even if a country is formally listed as having adopted IFR, the adoption may &e a

to%en gesture# $his is an important cave$he earliest possi&le year of adoption in our sample is

2002 !the first year after the formation of the I./"#

ince macroeconomic data that compose our independent varia&les are not availa&le for years

&eyond 2004, we censor adoption information in 2004# In other words, we record the IFR

adoption status and the year of adoption !if applica&le" &etween the years 2002 and 2004#

Even if a country has adopted IFR since 2004, they are classified as non-adopters for the

purposes of our empirical tests# $here are four such countries in our sample effective 7uly ,

200


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#ountry-level adoption decisions on the I.plus#com we&site are categoried into four groups+

IFR re'uired for listed companies8 IFR re'uired for some listed companies8 IFR permitted

for listed companies8 and IFR not permitted for listed companies# For the purposes of our

empirical analyses, we reclassify these four categories into three+ adopters8 partial adopters8 and

non-adopters# $he 9adopters: in our dataset are those classified &y I.plus#com as having 9IFR

re'uired for listed companies#: $he 9non-adopters: are those classified as having 9IFR not

permitted for listed companies#: $he 9partial adopters: in our dataset are a com&ination of the

second and third I.plus#com categories# )e com&ine these two categories into 9partial

adopters: since only four countries in our sample of 102 can &e classified as having 9IFR

re'uired for some listed companies#:

!.2. )eveloping pro*ies for the IFRS-aoption eterminants

In this su&-section, we descri&e our pro*ies for the determinants of IFR adoption

identified in ection 2## $he data including, the )orld /an%(s )BI data&ase, .ndrei

hleifer(s we&site at 5arvard University,1

the Economist magaine(s data archives, and the

United Cations we&site# .ppendi* / provides a detailed list of all pro*ies, definitions, and

original sources or these pro*ies are collected from numerous data sources

31 | P a g e


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#

+alue from having a share %oy of accounting stanars+

In ection 2##1, we argue thatcountries where the level and e*pected growth in foreign

capital and trade are higher are more li%ely to value the economic &enefits that can accrue

from adopting IFR# Dur pro*ies for the level of foreign capital are the ratio of net

foreign direct investment inflows to AB@ !F)I" and the ratio of foreign e'uity portfolio

investments to AB@ !F,I"# Bata to computeF)I andF,I are o&tained from the )BI

data&ase# )e collect values for these varia&les forall years from 2001 through 200;# $he

independent varia&les lag the dependent varia&les &y one year since contemporaneous

macroeconomic data are unli%ely to &e availa&le when a country is considering IFR

adoption# Dur pro*ies for e*pected growth in foreign capital are realied growths inF)I

andF,Iover the relevant prior one-year period !F)I'hgandF,I'hg"# )e

measure the level of and e*pected growth in foreign trade as the ratio ofe*ports of goods

and services to AB@ !,*ports" and the one-year change in e*ports-to-AB@

!,*ports'hg", respectively# .s with foreign investments, data on e*ports are collected

from the )BI data&ase for the period 2001 through 200; period#

/uality of local governance institutions+ D&taining good pro*ies for the 'uality of local

governance institutions is particularly difficult for at least two reasons# First, the

governance institutions in a country are li%ely to &e influenced &y its natural endowment

and endogenous to its other human institutions+ thus, a governance system that is 9good:

!high 'uality" for one economy can &e ineffective in others# . cross-country metric of

governance institution 'uality must account for this potential variation in governance

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institutions# econd, data to construct detailed cross-country metrics are limited to a few,

mostly large economies# For e*ample, ?c=insey N ompany puts out the results of an

annual ED survey of governance factors li%e the 'uality of auditing and accounting, &ut

these data are only availa&le for a&out 2 non-EU countries#

In o&taining pro*ies for the 'uality of local governance institutions, we consider &oth

process-&ased and output-&ased measures# @rocess-&ased measures li%e governance indices

are popular in the literature# $he pro&lem with these measures, as alluded to earlier, is that

different processes are li%ely to &e optimal for different economies, depending on their

natural endowments and other human institutions# Dutput-&ased measures li%e AB@ are

appealing &ecause notwithstanding the process, if the o&ective of all governance

institutions is economic development, outputs are a relia&le indicator of the 'uality of those

institutions#

$he pro&lem with output-&ased measures is that natural endowments and human

institutions not concerned with governance can influence outputs independently of

governance systems# Dur oint use of process and output &ased measures !through factor

analysis, discussed shortly" is an attempt to mitigate these competing costs and &enefits#

Dn process-&ased measures, we o&tain &oth &roader indicators li%e indices of credit rights

!'reitRights", property rights !ropRights", and government corruption

!0ov'orruption" from .ndrei hleifer(s we&site and more narrow measures li%e the num&er

of days to enforce a contract !)ays,nforce" and the num&er of rules to start a &usiness

!StartupRules" from the )BI data&ase# In addition, we use the Economist magaine(s

33 | P a g e


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democracy score !,con)emocracy"#

$he score !scaled from 1 to 10" is intended to capture the 'uality of the electoral process,

the functioning of government, diversity in political participation, and the e*tent of civil

li&erties# Finally, /ushman and @iotros%i !200;" refer the literature to an inde* of the

impartiality of the udicial system produced &y the Fraser Institute, which we also incorporate

in our analysis !Fair'ourts"# $he &road indices that capture rights of capital owners, udicial

processes, corruption, and civil li&erties are li%ely to &e correlated with the information and

control institutions that facilitate efficient allocation of capital in an economy8 they are,

however, su&ective# $he narrower measures li%e contract-enforcement days and start-up

rules are more o&ective and can pro*y for poor government facilitation of &usiness

!&ureaucratic red tape", or entrenched &usiness interests !oligopolists who have created

&arriers to entry", or &oth#

Dur primary output-&ased measure is per capita AB@ !0)'"# ountries with higher per

capita AB@ are richer, and thus, more li%ely to have &etter developed governance institutions#

Df course, as noted earlier, per capita AB@ is also influenced &y natural endowments, so we

calculate a measure of AB@ that attempts to separate the effects of the

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latter, 0)'I# pecifically, 0)'Iis the residual from an annual regression of

per capita AB@ on e*ports of fossil fuels, minerals, and ores# In addition to AB@, we use data

on stoc% mar%et sie !Stock0)" and turnover !StockTurn"+ the relative sie and activity

of a country(s stoc% mar%ets can &e a reasona&le output-&ased indicator of the 'uality of its

capital mar%et governance# Finally, we use two human-development-&ased output measures,

Infantortality andAultIlliteracy# )hile, the relation &etween the human development

measures and the 'uality of information and control institutions is li%ely indirect, countries

with the poorest human development are li%ely to &e failed or near-failed states, where

adoption of IFR is unli%ely to &e of any interest or conse'uence#

International ower olitics+ )e use a host of pro*ies to identify cross-sectional variation in

countries( power status# First, we use the num&er of years a country has &een elected to the

United Cations ecurity ouncil !3$S'"# /eing elected to the ecurity ouncil re'uires

political influence since countries must gain the support of a plurality of the United Cations

Aeneral .ssem&ly# )e argue that the political influence necessary of a country to secure a

ecurity ouncil seat can &e a reasona&le pro*y for the a&ility of a country to advance its

interests with an international &ody li%e the I./# ecurity ouncil mem&ership data are

aggregated &y year from the inception of the United Cations in 136;# .s &efore, data for the

years 2001 through 200; are collected# Bata for all countries up to year 2001 are availa&le in

=uiem%o and )er%er !200;"# u&se'uent data are collected from the United Cations

we&site# $he five permanent mem&ers of the UC !hina, France, Russia, the United

=ingdom, and the U" are coded as &eing mem&ers in every year since 136; !and thus are

represented &y this measure as &eing very powerful"#

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In addition to years on the ecurity ouncil, we also represent a country(s power &y its

0)Rank !in current U dollars", itsopulation, and its geographicArea# $he rationale for

0)Rank is that larger economies are more li%ely to have &argaining power on the

international stage than smaller ones#opulationis used as a pro*y for the sie of a country(s

mar%et# ountries with larger mar%ets are more attractive destinations for investors are thus

also more li%ely to have political &argaining power#Areacan also &e a pro*y for power since

larger countries are historically more powerful !they re'uire larger militaries to esta&lish and

maintain their territories"# Bata on AB@ and population are collected from the )BI data&ase

36 | P a g e


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on a yearly &asis for the years 2001 through 200;# .rea data are collected from the we&site

worldatlas#com and are static over the years 2001 through 200;#

'ultural closeness to ,urope+ $o pro*y for countries that are culturally closer to Europe, we

use the proportion of a country(s population that is hristian !'hristian"# )e argue that more

hristian nations are more li%ely to &e comforta&le with European institutions li%e IFR

since hristianity in these countries is li%ely to have spread through coloniation &y

European powers# Bata on the proportion of hristians in a population are &ased on 13


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as of the prior year# $he networ%-effect pro*ies enter the analysis in su&se'uent haard-

model-&ased multivariate tests#

1in and )ei !13


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li%ely to &e particularly important when evaluating the statistical significance of the pro*y for

synchroniation effects !i#e#, the proportion of countries within region that have adopted"#

$a&le reports the results of the counting-process haard analysis# $here are four panels to

$a&le # In @anel ., the independent varia&les include+latform,latform'hg,

/5ocal0ov1,Interower,'ulture, andctAopt# )e also include the s'uared value of

governance institution 'uality, /5ocal0ov1>2, since we predict a non linear relation &etween

governance institution and IFR adoption# In @anel /, we use 0)ctAopt, the AB@-

weighted proportion of IFR adopters within a country(s geographical region, to pro*y for

networ% effects# .ll other covariates are similar to those in @anel .# @anel is also similar to

@anel ., e*cept that networ% effects are represented &yIFRSTrae, the percentage of total

e*ports to countries that have adopted IFR as of the prior year# In @anel B, we use

/5ocal0ov2 to pro*y for governance institution 'uality, i#e#, we use the governance

institutions factor that controls for the effects of natural endowments on AB@# .ll other

covariates in @anel B are similar to those in @anel .#

Inferences are similar across all four panels of $a&le # pecifically, the coefficients on

pro*ies for governance institution 'uality, international power politics, and networ% effects are

statistically significant at the 3O confidence level or greater, while the coefficients on pro*ies

for cultural closeness to Europe and levels and changes of international investment and trade are

not# $he evidence in $a&le does not confirm that countries adopt IFR &ecause they value

having a shared &ody of international standards or that cultural considerations vis-S-vis Europe

affect IFR adoption decisions#

$here is evidence that 'uality of local governance institutions has a non-liner association

with IFR adoption# $he first-order coefficients on the factors for governance institutions are

positive, while the second-order coefficients are negative# $he marginal effects on these coefficients

in @anel . of $a&le suggest that an inter-'uartile increase in /5ocal0ov1is associated with a

3;#


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harmoniation of accounting standards is unli%ely to &e of must interest, and

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countries with good governance institutions, where IFR adoption is li%ely to &e

associated with high opportunity and switching costs#

$he negative coefficients on the pro*ies for international power politics imply that

IFR adoption is less li%ely among more powerful countries# $his relation is consistent

with the proposition that more powerful countries are more wary of losing domestic

authority over accounting standard setting# $he dominance of the EU in IFR standard

setting and uncertainties in the political process of international standard setting can &e

associated with the reluctance of more powerful countries to adopt IFR# $he change in

haard statistic for power in panel . of $a&le is -6#3


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Dverall, from the haard analyses we can conclude the following+ !1" more

powerful countries are less li%ely to adopt IFR8 !2" a country is more li%ely to adopt

IFR as the proportion of IFR adopters within its region or among its trade partners

increases8 and !" there is a 'uadratic relation &etween the 'uality of local governance

institutions and IFR adoption, where adoption at first increases and then decreases with

governance 'uality#

14.s noted earlier, we use the num&er of years a country has served on the UC as an input in constructing

our measure of power# hina, Russia, and the U, as permanent mem&ers of the UC, are thus assigned

relatively high scores on power# Cone of these three countries have adopted IFR fully# $o ensure that the

results on power are not driven &y the permanent UC mem&ers, we repeat the analysis in $a&le after

e*cluding these countries !hina, Russia, and the U" from the sample# $he results are su&stantively

unchanged, suggesting that the sign and significance on power in our multivariate analyses are not driven &y

the disproportionate influence of permanent mem&ership in the UC on this measure#

Table +

Panel A

.ssociation of a country(s IFR adoption status in 2004 with the median adoption

status of countries in its region

'), Adoption tatus

.dopters@artial Con-

Totaladopters adopters

.$er /0 o! Co 2 14 ==

re%ion has adopted Tes 16 ; 29

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Total !: 2! 68 182

Statistic p-value

hi-'uare #


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Table + 4 Cont5

Panel C

.ssociation of a country(s IFR adoption status in 2004 with the median adoption status

of its e*port destination countries

'), Adoption tatus

.dopters@artial Con-

Totaladopters adopters

.$er 10 o! export Co 14 1 26 96

destinations ha$e adopted Tes 22 10 1; 6;

Total !: 2! 68 182

Statistic p-value

hi-'uare 2#2


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Table /

5aard analysis of adoption decisions among non-EU countries !ounting-process method"

latf

orm

latform

'hg

/5ocal

0ov1

/5ocal0o

v1>2

/5ocal

0ov2

/5ocal0o

v2>2

Inter

ower

'ul

tur

e

ctA

opt

0)ctAopt

IFRSTrae

>og>

C

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6A7 6B7 6C7 6D7

Estimate Chan%e in Estimate Chan%e in Estimate Chan%e in Estimate Chan%e in

St ,rr 8a9ard St ,rr 8a9ard St ,rr 8a9ard St ,rr 8a9ard

0#143 1;#1O 0#212 13#O 0#110 3#


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ee .ppendi* / for varia&le definitions, $a&le 1 for a description of the sample, and

ection #1 for a description of the regression model# $hroughout, PPP, PP, and P indicate

statistical significance at the 33O, 3O, and 30O levels, respectively#

Table :

5aard analysis of adoption decisions among non-EU countries !ounting-process

method" including I./ specific varia&les

latform

latform'hg

/5ocal0ov1

/5ocal0ov1>2

Interower

'ulture

ctAopt

IAS?Trustees

IAS?)onor

>og>

C

6A7

Estimate Chan%e in

St ,rr 8a9ard

0#204 1


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ee .ppendi* / for varia&le definitions, $a&le 1 for a description of the sample, and ection #1

for a description of the regression model#IAS?Trusteesis the num&er of persons serving as

I./ trustees for a given country in a given year#IAS?)onoris a dummy coded one if at least

one organiation from a given country in a given year contri&uted to the I. Foundation#

$hroughout, PPP, PP, and P indicate statistical significance at the 33O, 3O, and 30O levels,

respectively#

9.2. Aitional analyses

.s a more e*plicit measure of switching costs to IFR, we rerun the regressions after including

a dummy for whether IFR is produced in the country in 200< the only I./-reviewed version

of IFR is in English, thus, the dummy identifies countries with English as an official language

!mostly, former /ritish colonies that conduct at least some official government &usiness in

English"# $his varia&le is not statistically significant, nor does its inclusion in the regressions

alter any inferences discussed thus far !results are not ta&ulated"#

In testing the hypothesis that IFR adoption is more li%ely among countries that are

culturally closer to Europe, we use the proportion of hristians in a population and the num&er of

years since a country &ecame independent from an EU country as our pro*ies# )e deli&erately avoid

using legal origin to pro*y for cultural closeness &ecause legal origin is associated with a colonial

relationship, and it is not clear that a previously e*isting colonial relationship in itself indicates a

close cultural tie &etween colonied and colonier# ?oreover, given that European countries once

colonied most of the glo&e, a measure of closeness &ased solely on former colonial relationships

would identify most countries in the world as culturally close to Europe#

Cotwithstanding the argument a&ove, given that the I./ is the successor &ody to the

.nglo-centric I. !which was popular within the ommonwealth", it is possi&le that current

I./ adopters are more li%ely to &e former /ritish colonies# In other words, it is possi&le that asu&stantial fraction of current I./ adopters are carryovers from the I. regime# )e test this

conecture &y repeating our multivariate tests upon including a dummy to indicate whether a

country has a /ritish-style common law system# $he coefficient on this dummy is not

statistically significant and already discussed results are unchanged !results unreported"#

In the tests reported on so far, we have used relatively e*ogenous macroeconomic


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varia&les to pro*y for the political determinants of IFR adoption# In $a&le ;, we report on tests

using more e*plicit varia&les for the relationships &etween countries and the I./# In particular,

we repeat the regressions in $a&le upon including, alternatively, !a" the num&er of trustees on

the I. Foundation from a given country, and !&" a dummy varia&le if the country is a donor to

the I. Foundation# $he num&er of trustees on the I. Foundation can pro*y for a country(s

influence with the I./, and thus for the accepta&ility of IFR to that country+ countries with

greater representation on the I. Foundation are more li%ely to adopt IFR# . similar

argument can &e made for donations from a given country to the I.#

/oth the num&er of I. trustees and donations to the I. are li%ely to &e endogenously

determined with the dependent varia&le, IFR adoption# In other words, IFR adopters are more

li%ely to &oth have represensupporters of the I./, and the direction of causality is difficult to

specify# .ccordingly, the results from the analysis in $a&le ; should &e interpreted with caution#

$he results from @anel . suggest that after controlling for determinants discussed earlier, the

li%elihood of IFR adoption is increasing in the num&er of trustees from a given country at the

I. !the coefficient on the trustee varia&le is positive and significant at the 3O confidence

level"+ an increase from ero to one I. trustee increases the haard of IFR adoption &y

1


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$his finding supports our treatment of partial adopters in the haard analyses


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##

Conclusion

)e investigate why there is heterogeneity in countries( decisions to adopt IFR8 in other

words, why some countries adopt IFR while others do not# )e focus our analysis on a sample of

102 non-EU countries, e*cluding the EU &ecause of it closeness to the I./# )e e*amine IFR

adoption over the period 2002 !the first full year of the I./(s e*istence" through 2004#

)e use the economic theory of networ%s to develop our hypotheses since a standard li%e

IFR is li%ely to &e more appealing to a country if other countries adopt it as well# In other

words, networ% theory allows us to e*plain the inter-temporal increase in the adoption of IFR

across countries# )e find evidence consistent with the li%elihood of IFR adoption for a given

country increasing with the num&er of IFR adopters in its geographical region and with IFR

adoption among its trade partners# $he result is significant for at least two reasons+ !1" it

suggests countries internalie the networ% effects of IFR in their adoption decisions8 and !2" it

suggests that as the networ% &enefits from IFR get large, countries may adopt the international

standards even if the direct economic &enefits from such standards are inferior to those from

locally developed standards#

Economic networ% theory predicts that in addition to networ% &enefits !synchroniation value", a

product with networ% effects can &e adopted due to its direct &enefits !autar%y value" !=at and

hapiro, 13ie&owit and ?argolis, 133;"# In the case of the IFR adoption decision &y a

country, we argue the direct &enefits are represented &y &oth the net economic and net political

value of IFR over local standards


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#

$he net economic value of IFR is intended to capture direct pecuniary &enefits as they

are usually conceived in economic models of networ%s# .ccordingly, we test whether economies

that are more reliant on foreign investment and trade are more li%ely to adopt IFR and whether

the li%elihood of IFR adoption decreases with the 'uality of domestic governance institutions

!a pro*y for &oth opportunity and switching costs"# )e find no evidence that the level of and

e*pected changes in foreign investment and trade affect the li%elihood of adoption# $hus, we

cannot confirm that IFR lowers information costs in more glo&alied economies# )e do find

some evidence that the li%elihood of IFR adoption at first increases and then decreases in the

'uality of countries( domestic governance standards# $his result can &e interpreted as consistent

with &oth the most poorly governed countries &eing less responsive to international standards,

and all other countries conditioning their IFR adoption decisions on the opportunity and

switching costs of domestic governance standards#

$he net political value of IFR is the &enefit arising from the potential political nature of

international accounting standard setting# If countries e*pect the EU to have a dominant role in

I./ affairs !/rac%ney and )itmer, 200", they are li%ely to have to cede some authority over

standard setting to EU interests# eding authority over local standards is, in turn, li%ely to &e less

palata&le to more powerful countries, which leads to the prediction that more powerful countries

are less li%ely to em&race IFR# $here is evidence in the data consistent with this proposition# In

addition to standard-setting power, cultural sensitivities can also affect the net political value of

IFR to a country# If the I.more distant from Europe are li%ely to &e less accepting of IFR

!Bing et al#, 2008 iesiels%i, 20048 Corris, 2004"# 5owever, we do not find evidence of cultural

differences &etween adopters and non-adopters / is perceived as a European institution,

countries t#


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#

Dur study of IFR adoption at the country-level can complement recent firm-level studies

on IFR# $he results of these firm-level studies are mi*ed# /arth et al# !200


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reveal potential errors in the I.plus#com

dataset# $he 9errors: are li%ely due to

disagreements among auditors on the e*tent to

which a country has adopted IFR+ several

countries adopt 9modified: versions of IFR,

and we suspect auditors do not agree on whether

the modifications are su&stantial enough to

constitute something apart from IFR#

econd, as noted earlier, our analysis covers IFR adoption through year 2004# .s more

countries adopt the international standards, the networ% &enefits from IFR adoption are li%ely

to increase# $his, in turn, can change the relative importance of direct !autar%y" &enefits and

costs in determining IFR adoption# In other words, the determinants of IFR adoption are li%ely

to &e dynamic, so the magnitude of coefficients documented in this paper are li%ely to vary as the

set of adopters !or non-adopters" is e*panded#

$he networ%-theoretic framewor% we use to e*plain the adoption of IFR across country-

time can &e applied in the study of other accounting and corporate governance phenomena# For

e*ample, the adoption of accounting methods, accounting standards, and corporate governance

&est practices &y firms and urisdictions are li%ely to depend on similar such actions &y

competitors and associates# In other words, inter-temporal variation in adoption decisions in

panel data, commonly studied in the accounting literature, can &e e*plained &y the 9networ%:

value of the product &eing adopted# $he method employed in this paper can &e a first step

towards a &roader use of networ% theory in motivating such studies#


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,e!erences

.rmstrong, #, ?#E# /arth, .#B# 7agoliner, and E#7# Riedl# 200


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hristensen, 5#/#, E# >ee, and ?# )al%er# 200e*UriervM>e*Urierv#doW

uriQD7+>+2002+26+0001+0006+EC+@BF#

# 200ondon, U=+ I./#http+MMwww#iasorgMCRMrdonlyresM33.3ondon, U=+ I.#

=al&fleisch, 7#B#, and R#># @rentice# 13#, and # hapiro# 13


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=night, F#5# 1326# ome fallacies in the interpretation of social cost# /uarterly @ournal

of,conomics ope-de-ilanes, .# hleifer, and R# ishny# 1333# $he 'uality of government#

@ournal of 5awB ,conomics an Crgani(ation 1+ 222-243#

>eone, ?# 200ie&owit, #7#, and #E# ?argolis# 1336# Cetwor% e*ternality+ .n uncommon tragedy#@ournal

of ,conomic erspectives


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Appendix A; >ist of sample countries &y region

,e%ion Countr ,e%ion Countr ,e%ion Countr

Asia-acific JFormer 'ommunist ?loc Jile-,ast

.ustralia!." /elarus !@." =uwait !."

/angladesh!C." /osnia and 5eregovina !." >e&anon !."/hutan!C." roatia !C." ?orocco !."

hina!C." Aeorgia !." Dman !@."

Fii!." =aa%hstan !." Xatar!."

5ong =ong !." =yrgystan !." audi .ra&ia !."

India!C." ?acedonia !." yria !C."

Indonesia!C." ?oldova !C." $unisia !C."

7apan!C." Russia !@." United .ra& Emirates !C."

>aos !@." er&ia !." $orth America

?alaysia !C." $ai%istan !." anada !C."

?aldives!@." U%raine !C." ?e*ico !C."

Cepal!C." U&e%istan !C." United tates !C."Cew ealand!." 5atin America Su%-Saharan Africa

@a%istan!C." .rgentina !C." /enin !C."

@apua Cew Auinea !." /olivia !@." /otswana !@."

@hilippines!C." /rail !@." /ur%ina Faso !C."

ingapore!C." hile !C." ote BYIvoire !C."

outh =orea!C." olom&ia !C." Ahana !."

ri >an%a!@." osta Rica !." =enya !."

$hailand !C." Ecuador!C." >esotho !@."

ietnam!C." El alvador!@." ?alawi !."

'ari%%ean Auatemala !." ?ali !C."

.ru&a!@." Auyana !." ?auritius !."/ahamas !." 5onduras !C." ?oam&i'ue !@."

/ar&ados!." Cicaragua !." Cami&ia !."

Bominica!@." @anama !." Ciger!C."

Bominican Repu&lic !." @araguay !@." outh .frica !."

5aiti !C." @eru !C." uriname !@."

7amaica!." Uruguay !C." wailand !@."

$rinidad and $o&ago !." eneuela !." $anania !."

,urope ile-,ast $ogo !C."

witerland!@." /ahrain !." Uganda !@."

$ur%ey !." Egypt !." am&ia !@."

Former 'ommunist ?loc Iran !C." im&a&we !@."

.rmenia!." Israel !C."

.er&aian !@." 7ordan !@."

.doption status is listed in parentheses ne*t to the country name with !." indicating full adopters

of IFR, !@." indicating partial adopters !i#e# countries in which IFR is re'uired for some listed

companies or in which IFR is permitted for listed companies", and !C." indicating non-

adopters as of 2004#

6


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Appendix B; aria&le definitions

Primar E!!ect "ariable De!inition ource

"alue !rom ha$in%

a shared bod o!

accountin%

standards

&ualit o!

local

%o$ernance

institutions

>evels

,*ports

F)I

F,I

hanges

,*ports'hg

F)I'hg

F,I'hg

@rocesses-&ased

measures

)ays,nforce

StartupRules

,con)emocracy

'reitRights

ropRights

Fair'ourts

0ov'orrupti

on

Dutput-&ased measures

0)'

0)'I

ratio of e*ports of goods and services to gross

domestic product !AB@"

ratio of foreign direct investment !FBI" inflows to AB@

ratio of foreign e'uity portfolio investments !FE@I"inflows to AB@

one-year change in ratio of e*ports of goods and services

to

AB@

one-year change in ratio of foreign direct investment

!FBI" inflows to AB@

one-year change in ratio of foreign e'uity

portfolio investments !FE@I" inflows to AB@

logarithm of num&er of days to enfore a

contract num&er of procedures to start a

&usiness

$he Economist(s democracy inde* &ased+ electoral

process and pluralism8 civil li&erties8 the functioning of

government8 political participation8 and political culture#

score of creditor

rights inde* of

property rights

inde* of impartiality of the udicial

system inde* of government

corruption

per capita AB@

per capita AB@ attri&uta&le to human institutions !not

natural endowments"8 residual from an annual regression

of per capita AB@ on e*ports of fossil fuels, minerals,

and ores#

)orld /an%

)orld /an%

)orld /an%

)orld /an%

)orld /an%

)orld /an%

)orld /an%

Economist

.ndrei hleifer

.ndrei hleifer

Freetheworld#co

m

.ndrei hleifer

)orld /an%

)orld /an%

Stock0) total value of stoc%s traded as O of AB@ )orld /an%

StockTurn O turnover ratio of stoc%s traded )orld /an%

Infantortality logarithm of infant mortality .ndrei hleifer

AultIlliteracy adult illiteracy rate .ndrei hleifer

3$S'num&er of years a country has &een elected to the United

United Cations

'nternational po(erCations ecurity ouncil

0)Rank ran% of AB@ in current U dollars )orld /an% politics

opulation population in thousands )orld /an%

Cultural closeness to

Area area in thousands )orldatlas#com

'hristian proportion of a country(s population that is hristian .ndrei hleifer

Europe 4earsFree years since independence from an EU country )orldstatesmen#org

ctAopt

percentage of countries within a geographic region that have

adopted IFR as of the prior year# Regions are defined in 5and ollected.ppendi* .#

Net(or< e!!ects0)ctAopt

AB@-weighted percentage of countries within a geographic

region that have adopted IFR as of the prior year# Regions 5and ollected

are defined in .ppendi* .#

IFRSTraepercentage of e*ports to countries that have adopted IFR as International ?onetary

of the prior year Fund


79/88


80/88

Appendix C; Factor compositions

E!!ect )actor Name)actor !rom principle )actor

Ei%en "alue Ncomponent analsis o!; =oadin%s

"alue !rom ha$in% a latform,*ports 0#


81/88

)5T .DUC$ICA $.CB.RB .CB RE@D$ICA $.CB.RB .RE REXUIREB IC ICBI.W

Globalization and liberalization have brought about significant changes in the attitudes and

perceptions of the corporate world. Due to advancement in the field of information technology,

the entire world has become a global village. To be precise, the whole world is a market with

global customers and global investors. In other words, now everything has become Glocal

!Global " #ocal$.

%ompanies are getting listed at stock&e'changes located in different countries. They are also

raising capital or making investments abroad. ( basic understanding, analysis and

interpretation of financial statements of those companies are pre&re)uisite before making such

foreign investments, raising capital abroad etc. *ut financial statements of those companies

abroad will be primarily based on the accounting principles and practices of the respective

country.

The difference in accounting principles and practices and also the reporting re)uirements

make the financial statements and reports ambiguous and unfriendly for the global investors.

(s already discussed, (ccounting is the language of business, it would be wise and helpful if

there is a common language for the whole world to understand the financial statements in an

unambiguous and friendly manner. There is an urge to converge accounting information into

common reporting standards which is globally accepted and adopted. +ence, I- came into

picture in India.


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66

6


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6;

project on accounts

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