The Effect of the Adoption of International Financial Reporting Standards on Foreign Portfolio Investment in Africa

Abstract

The proponents of the International Financial Reporting Standards (IFRS) as a financial reporting framework suggest that companies’ financial statements become more comparable, transparent, credible, and reliable by adopting IFRS, which may promote foreign investment inflows. Consequently, some literature posits that when a country’s authorities adopt IFRS, it will help to increase foreign portfolio investment (FPI). Only a few studies investigated the effect of IFRS adoption in Africa on FPI. However, because of mixed findings in previous studies, the problem remains that it is still unknown and uncertain what effect IFRS adoption has on FPI in Africa. This chapter aims to demonstrate how a quantitative method was applied to analyze empirical data to test whether IFRS adoption in African countries affects their FPI. Within a positivistic paradigm, secondary panel data were collected to perform mainly regression analyses to test the above association. The study found that countries that adopted IFRS experienced a statistically significant positive effect on their FPI inflows. However, a limitation was that the capital market in Africa is underdeveloped, with few listing securities. The value of this study to the accounting literature is that it can potentially contribute to policy formulation in Africa.