Alshamari_whole_thesis.pdf (3.42 MB)
Are Australia's foreign investment inflows significantly higher following the introduction of A-IFRS?
thesisposted on 2023-05-28, 08:49 authored by Alshamari, ASN
In June 2002, the Australian Financial Reporting Council (FRC) made the decision to adopt the Australian equivalent of the International Financial Reporting Standards (A-IFRS). A-IFRS became mandatory on the 1st of January 2005, for all companies reporting in Australia. The primary aim of converging to international accounting standards was to facilitate cross-border comparisons by investors, and enable Australian companies to access international capital markets ...‚ÄövÑvp (Commonwealth of Australia, 2002, p. 102). Accounting information is critical for investment decision making. However, as there is considerable variation in accounting standards and disclosure requirements from country to country, foreign investors are aware of being informationally disadvantaged, compared to local investors. A single accounting regime, such as International Financial Reporting Standards (IFRS), is, therefore, expected to reduce the differences in accounting standards between countries, increase the comparability of accounting information, enhance investors' understanding of the financial reporting of the host country, and increase foreign investor confidence in investing in the host country. The main argument advanced for the application of IFRS by a developed country such as Australia, which has existing high-quality accounting standards, was to improve foreign investment inflows. A broad research question is developed to assess whether foreign investment inflows to Australia increased following the introduction of A-IFRS, a phenomenon known as 'economic consequences' in the accounting literature (Zeff, 1978). These 'economic consequences' reflect the changes in the decision-making behaviour of foreign investors, as discussed in this thesis, following the changes in accounting standards to A-IFRS. Building on the finance and accounting literature, the question is further developed for each individual component of foreign investment inflows (i.e. portfolio equity, direct equity, direct debt (between the affiliates), portfolio debt, loans, derivatives, and other debt) to consider how each component can be affected differently, and why. Thus, this thesis aims to examine the economic consequences of A-IFRS on each component of foreign investment inflows. A number of features make Australia an ideal country for which to examine foreign investment inflows. Firstly, prior to A-IFRS, Australia had a high-quality set of accounting standards, similar to IFRS. Secondly, with the sound governance of local institutions, strong legal enforcement, and a developed open market, Australia is more likely to have increased foreign investment inflows. Thirdly, Australia implemented A-IFRS as a national-level policy, whereby Australian accounting standards have legislative backing. This means that all entities, both public and private, must prepare their financial statements according to A-IFRS. Therefore, the use of macro-level data, rather than micro-level observations, produces results that are valid as a level of analysis for this country. Using the quarterly aggregated and disaggregated series of foreign investment inflows from 1998Q1 to 2012Q4, the research design of the study consists of two stages. In the first stage, a structural break test is used to identify whether there is any break point around the A-IFRS application period in the data series. Previous studies have used dummy variables to capture the period of IFRS application by taking a value of 1 for the post-application period and 0 for the pre-application period. These studies, however, tend to pre-select the date of effect. Previous studies have indicated that the reaction of foreign investors toward public information can differ depending on the type of investment, which reflects their role in the entities in which they invest. Therefore, they may not respond to the use of A-IFRS on the same date. Hence, an endogenous structural break test is used to detect any break endogenously; in other words, the selection of the break is led by the data. Because the data covers 24 years, more than one structural break is strongly anticipated. Therefore, an endogenous multiple structural break test is applied. To determine whether the identified break point can be associated with A-IFRS, an event window is constructed from 2004Q3 to 2007Q3, taking into consideration the transition, consolidation, and mandated reporting time lines. The structural break test is a univariate approach, in which any break identified within the A-IFRS event window could be associated with any other economic events that occurred around that time. The magnitude of the changes observed in the foreign inflow variables could be explained by the commodity-price boom experienced in Australia in 2003/2004. The increase in inflows could also be explained by other factors such as the increased growth rate, rising interest rates, improved terms of trade, and the appreciation of the Australian dollar to a 30-year high. Therefore, in the second stage of the empirical analysis, an Autoregressive Distributed Lag (ARDL) model is developed to control for other possible events and to assess the effects of A-IFRS by including macroeconomic variables: real gross domestic product (RGDP), terms of trade (TOT), economic openness (OPEN), real exchange rate (EXCH) and lending rate (INT), and other global financial crises. The combined empirical evidence of both methods provides comprehensive insights into the effect of the application of A-IFRS on foreign investment inflows. Consistent with expectations, the multiple structural break test indicates the presence of a break around 2004Q4 for aggregated foreign investment. Disaggregating this inflow further into debt and equity components allows any early or late implementation effects to be assessed. Portfolio equity and loans appear to have a positive break during A-IFRS implementation (2005Q3), while portfolio debt (2004 Q3) appears early during the transition period, which may reflect the importance of accounting reports in decision making for such components. The remaining foreign investment inflows indicate implementation lags around 2007. As expected, the only exception is direct equity, which indicates a structural break outside the event window (2003Q4). The endogenously determined structural breaks are tested further using the ARDL model. With the exceptions of other foreign debt and foreign direct equity, the results confirm a significant association between A-IFRS and foreign investment inflows such as portfolio (debt and equity), loans, derivatives, and direct debt. These findings strongly suggest that A-IFRS application may indeed have played a significant role in enhancing public information and increasing foreign debt and equity inflows. The findings highlight the fact that, in order to facilitate cross-border investment flows, it is vital to resolve the differences in accounting standards, thereby echoing the prediction of the Commonwealth of Australia (2002), mentioned above. This thesis has broad implications for the accounting literature and for event studies. Firstly, instead of focusing on cross-sectional analysis, this thesis uses time-series, multiple endogenous structural break tests and controls for macroeconomic conditions using an ARDL model. These methods could also be applied at the firm level, to provide a better understanding of the effects of the implementation of any given set of accounting standards. Secondly, the findings are potentially useful to the International Accounting Standards Board (IASB) in its quest for a strategy to facilitate the global application of IFRS. Thirdly, the findings are important for any other country considering the application of IFRS, for both developed and developing countries, and for global stakeholders and lending agencies such as the IMF and the World Bank, which are important 'foreign investment providers' (providing aid loans) for developing countries. Fourthly, the findings are also important for the Australian Accounting Standards Board (AASB) and others, including the Department of Foreign Affairs and Trade (DFAT) and the Australian Taxation Office (ATO), as they provide a better understanding of the effects of A-IFRS on various investment inflows, debt and equity.
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