Abstract
This paper examines the effect of foreign direct investments (FDIs) on financial reporting quality in transitional economies. When moving from a planned economy towards a market-based economy, firms need to be able to attract more non-governmental financing. While still the quality of institutional structures is low, non-governmental financing comes in the form of FDI. Therefore, in a changed environment firms need to produce higher quality financial reporting to acquire capital. Accounting quality is measured as conditional conservatism, i.e., asymmetric recognition of gains and losses. In our study data from 12 transitional economies in Central and Eastern Europe is analysed. The results indicate that investment freedom, and freedom from corruption increase earnings quality. Moreover, the results show that high level of FDIs is associated with high conditional conservatism indicating that FDIs increase the incentives for high quality financial reporting, especially when the free flow of foreign capital is limited.
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