Investor Protection and the Role of Firm-Level Financial Transparency in Attracting Foreign Investment

Abstract

We ask if companies can attract foreign equity capital by improving the transparency of their financial statements. Using a large panel of firms across fifty-one countries outside the U.S., we show that the answer is yes, but only in countries with relatively high levels of investor protection. In countries with poor investor protection, unilaterally increasing firm-level transparency has no effect on foreign ownership. Furthermore, our results indicate that in countries with higher levels of investor protection the positive association between transparency and foreign ownership is stronger following a country’s adoption of the International Financial Reporting Standards.