Foreign Direct Investments Affecting Accounting Quality in Transitional Economies of Europe

Sanna Hämäläinen, Minna Martikainen

Research output: Contribution to journalArticleScientificpeer-review

2 Citations (Scopus)

Abstract

The purpose of this paper is to examine the effect of Foreign Direct Investments (FDIs) on financial reporting quality in transitional economies. After moving from a planned economy towards a market based economy, firms need to attract more non-governmental financing. When the quality of institutions is low, foreign investments mostly come in the form of FDI. Therefore, in a changed environment firms need to produce high quality financial reporting to be able to acquire capital. Accounting quality is measured as earnings conservatism, i.e. asymmetric recognition of gains and losses. Data from 12 transitional economies in Central and Eastern Europe is analyzed. The results of this paper indicate that investment freedom, especially free flow of foreign capital, and freedom from corruption increase earnings quality measured by earnings conservatism. Moreover, the results show that high level of FDIs is associated with high earnings conservatism indicating that FDIs increase the incentives for high quality financial reporting. The results also show that FDIs improve earnings quality only when the free flow of foreign capital is limited. When FDIs are defined as change in FDI, the results are reversed. This is because the growth is highest in countries with low level of FDIs.


Original languageEnglish
Peer-reviewed scientific journalInternational Journal of Business Innovation and Research
Volume9
Issue number3
Pages (from-to)295-310
ISSN1751-0252
DOIs
Publication statusPublished - 2015
MoE publication typeA1 Journal article - refereed

Keywords

  • 512 Business and Management
  • accounting quality; earnings conservatism; transitional economies; foreign direct investments; investment environment; institutional quality

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