The Effect of IFRS Adoption on Trade and Foreign Direct Investments

This paper focuses on the importance of accounting harmonisation on foreign activities from a macroeconomic perspective. International Financing Reporting Standards (IFRS) adoption is considered to reduce information costs among countries and is, therefore, an important way to encourage international trade flows and investments. Moreover, heterogeneity in trade and FDI determinants among different European countries (well-established capitalist countries in the "West" and post-communist countries in the "East") is analysed since transition economies present a lower development of market institutions and, therefore, of financial systems. The effect of IFRS adoption is analysed from a gravity framework. The fixed-effects vector decomposition (FEVD) procedure, recently proposed by Plumper and Troeger (2007), is used to estimate panel data characterised by the presence of time invariant variables, or variables which vary rarely in time. The results provide evidence that benefits exist in terms of trade and FDI when IFRS are adopted. Furthermore, the positive effect of adopting uniform accounting standards on foreign activities in Europe is higher in transition economies. Finally, this effect also differs in countries because of behavioural factors such as unfamiliarity aversion.This paper was presented at the 18th International Conference of the International Trade and Finance Association, meeting at Universidade Nova de Lisboa, Lisbon, Portugal, May 23, 2008.Keywords: IFRS, international trade, FDI, transition countries, FEVD. JEL classification: F40