Foreign Direct Investment and Conditional Accounting Conservatism in South Asia

Main Article Content

Isuru Manawadu
Anna Che Azmi
Mohamed Aslam

Abstract

Research aim: The purpose of this study is to investigate the effect of foreign direct investment (FDI) on conditional accounting conservatism in South Asia.


Design/ Methodology/ Approach: This study uses the model developed by Basu (1997), Ball and Shivakumar (2005), and Hämäläinen and Martikainen (2015) to examine the relationship between FDI and conditional accounting conservatism. Accounting data were obtained from all public listed companies other than financial companies in India, Pakistan, Bangladesh, and Sri Lanka for 2006 through 2015.  The ordinary least squares (OLS) method in panel regression was used.


Research finding: The results indicate that a significant positive relationship exists between FDI and conditional accounting conservatism in South Asia as a whole, and the individual countries of India, Pakistan, and Bangladesh. However, FDI does not positively affect conditional accounting conservatism in Sri Lanka. Furthermore, emerging economies have more incremental conditional accounting conservatism on FDI than transitional economies.


Theoretical contribution/ Originality: The model used in this study makes an important contribution to the literature, which was confirmed by sensitivity testing. The result was more sensitive for the FDI variable. Also, the study confirmed that more incremental conditional accounting conservatism can be seen when using real FDI than when using a dummy FDI. This study extends the South Asian literature on conditional accounting conservatism and fills a gap in the empirical studies on FDI and conditional accounting conservatism.


Practitioner/ Policy implication: The results will be useful to policymakers and authoritative accounting bodies in the respective countries in South Asia to ensure the quality of financial reporting so as to facilitate FDI.


Research limitation/ Implication: This study used the conditional accounting conservatism to measure accounting quality. However, other methods such as earnings management, value relevance etc. for measuring accounting quality could be used with FDI in future researches.   


Keywords: Accounting Quality, Foreign Investment, Emerging Economies, Conservatism


Type of manuscript: Research paper


JEL Classification: M41, F21, N40, M48

Downloads

Download data is not yet available.

Article Details

Section
Research Article

References

Ali, M. J., Ahmed, K., & Henry, D. (2004). Disclosure compliance with national accounting standards by listed companies in South Asia. Accounting and Business Research, 34(3), 183-199.
Altman, D. G., & Royston, P. (2006). The cost of dichotomising continuous variables. British Medical Journal, 322, 1080.
Arthur, S., & Sheffrin, S. (2003). Economics: Principles in action: Pearson Prentice Hall.
Bahadur, F. (1996). Foreign direct investment through privatization in development countries. Tribhuvan University Journal, 19(2), 105-110.
Ball, R., & Shivakumar, L. (2005). Earnings quality in UK private firms: comparative loss recognition timeliness. Journal of Accounting and Economics, 39(1), 83-128.
Basu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings Journal of Accounting and Economics, 24(1), 3-37.
Beaver, W. H., & Ryan, S. G. (2005). Conditional and unconditional conservatism: Concepts and modeling. Review of Accounting Studies, 10(2-3), 269-309.
Daniel, C., & Andres, L. (1999). Globalization and developing countries: Foreign direct investment and growth and sustainable human development. Geneva: United Nations.
Dechow, P. M., Ge, W., & Schrand, C. M. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50(2,3), 344-401.
Ding, S. J., Liu, M. Z., & Wu, Z. Y. (2016). Financial reporting quality and external debt financing constraints: The case of privately held firms. Journal of Accounting Finance and Business Studies, 52(3), 351-373.
Drabek, Z., & Payne, W. (2002). The impact of transparency on foreign direct investment. Journal of Economic Integration, 777-810.
Emeni, F. (2014). Foreign direct investments and international financial reporting standards adoption in Africa. Ushus Journal Business Management, 13(3), 27-44.
Feige, E. L. (1994). The transition to a market economy in Russia: property rights, mass privatization and stabilization. A fourth way, 57-78.
Feng, C., Ole-Kristian, H., Qingyuan, L., & Xin, W. (2011). Financial reporting quality and investment efficiency of private firms in emerging markets. The Accounting Review, 86(4), 1255-1288.
Fortin, H., Barros, A. C., & Cutler, K. (2010). Accounting for growth in Latin America and the Caribbean: improving corporate financial reporting to support regional economic development: World Bank Publications.
Francis, J., Olsson, P., & Schipper, K. (2006). Earnings quality. Foundations and Trends in Accounting and Finance, 1(4), 259-340.
Hämäläinen, S., & Martikainen, M. (2015). Foreign direct investments affecting accounting quality in transitional economies of Europe International Journal of Business Innovation and Research, 9(3), 295-310.
Hribar, P., Kravet, T., & Wilson, R. (2013). A new measure of accounting quality. Review of Accounting Studies, 19(1), 506-538.
Iatridis, G. E. (2011). Accounting disclosures, accounting quality and conditional and unconditional conservatism. International Review of Financial Analysis, 20(2), 88-102.
IFRS Foundation. (2016). IFRS use around the world - Jurisdiction profiles. Retrieved from http://www.ifrs.org/
Kravet, T. D. (2014). Accounting conservatism and managerial risk-taking: Corporate acquisitions. Journal of Accounting & Economics, 57(2-3), 218-240.
Laura, A., Areendam, C., Sebnem, K.-O., & Selin, S. (2004). FDI and economic growth: The role of local financial markets. Journal of International Economics, 64(1), 89-112.
Luo, Y., & Peng, M. (1998). First mover advantages in investing transitional in economies. Thunderbird International Business Review, 40(2), 141-163.
Moran, T. H. (1998). Foreign direct investment and development: The new policy agenda for developing countries and economies in transition: Peterson Institute.
Rolph, V. d. H., & György, S. (1997). Lessons from privatization: Labour issues in developing and transitional countries: International Labour Organization.
Royston, P., Altman, D. G., & Sauerbrei, W. (2006). Dichotomizing continuous predictors in multiple regression: A bad idea. Journal of Stantistics in Medicine, 25(1), 127-141.
Sahoo, P., Nataraj, G., & Dash, R. K. (2014). Foreign direct investment in South Asia: Policy, impact, determinants and challenges: Springer India.
Schipper, K., & Vincent, L. (2003). Earnings quality. Journal of Accounting Horizons, 17, 97-110.
Stigler, S. M. (1977). Do robust estimators work with real data? The Annals of Statistics, 5(6), 1055-2098.
Stubben, S. R. (2010). Discretionary revenues as a measure of earnings management. The Accounting Review, 85(2), 695-717.
Uhlenbruck, K., & De Castro, J. O. (2000). Foreign acquisitions in Central and Eastern Europe: Outcomes of privatization in transitional economies. Academy of Management Journal, 43(3), 381-402.
World Bank. (2016). South Asia Countries World Bank. Retrieved from http://web.worldbank.org/