The impact of financial development, IFRS, and rule of LAW on foreign investments: A cross-country analysis

Abstract

The purpose of this study is to examine the effects of financial development, International Financial Reporting Standards (IFRS), and rule of law on foreign investments in 51 advanced and developing countries over the period from 1997 to 2017. The study is motivated by the argument that the lack of portfolio investments results mainly from asymmetric information that can be mitigated by providing reliable and relevant information based on IFRS and a strong rule of law. Using country-level data obtained from the IMF, World Development Indicators, and World Governance Indicators websites, it was found that financial development, IFRS, and rule of law are important for foreign investments. Although empirical analyses indicate that financial development, IFRS and rule of law have individually a significant positive effect on foreign direct investments relative to total investments, this positive effect is mitigated for interactions of these variables, suggesting that international investors would prefer portfolio rather than direct investments in financially developed countries adopting IFRS and an effective rule of law. The findings are important for stakeholders who are interested in financial development, IFRS, rule of law and their impacts on foreign investments.