Financial Reporting and Foreign Direct Investments in Latin America

Abstract

Abstract Purpose This paper explores the relationship between foreign direct investments and financial reporting changes via financial development in 12 Latin American countries during the period from 1997 to 2010. Methodology/Approach In order to control the possible endogeneity problem, the Generalized Method of Moments (GMM) estimation technique has been conducted using country-level panel data obtained from the World Development Indicators website. Findings The empirical analyses provide evidence that international accounting standards have a significant effect on foreign direct investments. However, financial development associated with such standards reduces this positive effect. This is an important finding, suggesting that investors are likely to prefer portfolio to direct investments in Latin American financial markets that require or permit the use of international accounting standards. Research Implications The conclusions that have been drawn from this study are important for investors, creditors, and regulators. Although international accounting standards appear to affect foreign investments, there could be a lack of adaptation of these standards to specific economic environments due to cultural, educational, and economic factors. Therefore, firms, regulators, professional organizations, and accounting firms should make necessary arrangements so that the benefits of using these standards increase their costs. Originality/Value The study contributes to the international accounting literature by examining the effects of international accounting standards and financial development on foreign direct investments in Latin America.