Effects of national accounting standards convergence to international accounting standards on foreign direct investment

Article history: Received March 25, 2015 Received in revised format June 1 2015 Accepted June 2


Introduction
One of the most important factors on attracting foreign investors to invest on Tehran Stock Exchange is to have transparent accounting rules and regulations.Over the past few years, there have been tremendous studies on challenges for foreign direct investment (FDI) (Graham & Krugman, 1995) in several countries.Cheng and Kwan (2000) reported that large regional market, good infrastructure, and preferential policy had a positive impact but wage cost maintained a negative impact on FDI through estimating the impacts of the determinants of FDI in 29 Chinese regions over the period 1985-1995.The impact of education was positive but not statistically significant.Besides, there was also a strong self-reinforcing impact of FDI on itself.In their survey, there was no convergence in the equilibrium FDI stocks of the regions during that period, but there was some convergence in the deviations from the equilibrium FDI stocks.Buckley et al. (2007) studied the determinants of Chinese outward direct investment (ODI) and the extended to which three special explanations require to be nested within the general theory of the multinational firm using official Chinese ODI data collected from 1984 to 2001.They reported "Chinese ODI to be related to high levels of political risk in, and cultural proximity to, host countries throughout, and with host market size and geographic proximity (1984)(1985)(1986)(1987)(1988)(1989)(1990)(1991) and host natural resources endowments (1992)(1993)(1994)(1995)(1996)(1997)(1998)(1999)(2000)(2001)".They also reported strong support for the argument that characteristics of the special theory assist to explain the behavior of Chinese multinational enterprises.
De Mello (1999) estimated the effect of FDI on capital accumulation, and output and total factor productivity (TFP) growth in the recipient economy for a sample of OECD and non-OECD countries over the period 1970-90.Although FDI was anticipated to boost long-run growth in the recipient economy via technological upgrading and knowledge spillovers, it is explained that the extent to which FDI was growth-enhancing relied on the degree of complementarity and substitution between FDI and domestic investment.
When there are some consistency between national accounting standards and international accounting standards, we may, at least, expect foreign investors to have better understanding on financial statements (Chen et al., 2014b).According to Benston (1980), there are accounting standards since we have public accountants, each person and firm may decide the standard by which they wish themselves understand.Therefore, when one talks for a procedure by which uniform accounting standards can be constructed and enforced, the call necessarily is for pursuing them on people who could choose to behave otherwise.Dechow and Dichev (2002) recommended a measure of one perspective of the quality of working capital accruals and earnings.One role of accruals in this study was to shift or adjust the recognition of cash flows over time so that the adjusted earnings could measure firm performance.Nevertheless, accruals need assumptions and predicts of future cash flows, therefore, they argued that the quality of accruals and earnings was non-increasing in the magnitude of estimation error in accruals.They derived an empirical measure of accrual quality as the residuals from firm-specific regressions of changes in working capital on past, present, and future operating cash flows and showed that observable company characteristics could be (e.g., volatility of accruals and volatility of earnings).They also explained that their measure of accrual quality was positively associated with earnings persistence.Chen et al. (2014) considered accounting standards as a component of the institutional infrastructure of a location and hypothesize that the convergence of domestic and International Financial Reporting Standards (IFRS) contributes FDI as it reduces information processing expenses for foreign investors.In addition, they studied that the effect of reduced information costs was stronger for partner countries whose accounting systems indicated bigger pre-convergence differences because they magnify the facilitating role of accounting standard convergence for FDI.
Zehri and Chouaibi (2013) identified certain explanatory factors, which more likely clarify the choice of applying IAS/IFRS adopted by developing countries (DCs) up to the year 2008.The empirical results have shown that the DCs most likely to adopt IAS/IFRS had a high level of economic growth, along with a legal system of common law and an advanced educational level.Zeghal and Mhedhbi (2006) developed an analysis of the factors influencing on the adoption of international accounting standards by developing countries.They reported that developing countries with the highest literacy rates, that had capital markets, and that had an Anglo-American culture were more likely to adopt international accounting standards.Lin et al. (2015) studied the choice between standard and non-standard FDI production strategies for Taiwanese multinationals.They reported that different production behaviors of MNEs depended on the foreign market size, trade costs, factor advantage, fixed investment costs and firm characteristics.In addition, each production strategy was influenced by various determinants as implied by their hypotheses.Nurunnabi (2015) performed an empirical investigation to study the impact of cultural factors on the implementation of global accounting standards (IFRS) in a developing country.The study approved the pressures of coercive, mimetic and normative institutional isomorphism to follow legitimacy via social expectations.In contrast to other studies, a lack of enforcement and a high level of corruption were detected during the periods of democratic government.

The proposed study
In 2006, there were some changes on national accounting standards in an attempt to make them closer to accounting standards.In this study, we select the information of 153 firms five years before and after this regulation and study the convergence of national accounting standards on international accounting standards on foreign investment.The proposed study of this paper uses two dependent variables including Information quality and Foreign direct investment (FDI).In addition, Change of standards for convergence is considered as an independent variable.Finally, Gross Domestic Product (GDP) is considered as control variable.Quality of accrual of financial statements is calculated by the method proposed by Dechow and Dichev (2002)

First model
The implementation of Kolmogorov-Smirnov yields Z = 1.317 with P-value = 0.094, which means the data are normally distributed.In addition, Fig. 1  As we can observe from the results of regression analysis, Durbin-Watson value is within desirable level, which means there is no correlation between residuals.R-Square is equal to 0.493, which means the regression model represents approximately 49% of the changes on the dependent variable.F-value is equal to 264.124, which means there is a linear relationship between independent variables and dependent variable.The coefficients of CFO t-1 and CFO t are statistically significant, which means these two variables influence on working capital.

The second model
The implementation of the Kolmogorov-Smirnov yields Z = 0.614 with P-value = 0.845, which means the data are normally distributed.As we can see from the results of regression analysis, Durbin-Watson value is within desirable level, which means there is no correlation between residuals.R-Square is equal to 0.919, which means the regression model represents approximately 92% of the changes on the dependent variable.F-value is equal to 22.598, which means there is a linear relationship between independent variables and dependent variable.The coefficients of two independent variables are statistically significant, which means they have positive and negative effects on foreign direct investment.

The results
In this section, we present details of regression analysis on various models presented earlier.

The first hypothesis: The effect of convergence of accounting standard on FDI
The first hypothesis of the survey investigates whether there is a meaningful change on foreign direct investment as a result of convergence on national accounting standards to international standards.Table 1 presents some basic statistics on FDI five years before and after standardization.The implementation of the Kolmogorov-Smirnov yields Z = 0.719 with P-value = 0.679, which means the FDI data are normally distributed.Moreover, the implementation of t-student test yields t=0.840 with P-value = 0.426, which means there is not any statistical difference on FDI before and after convergence of accounting standards.

The second hypothesis: The effect of convergence of accounting standard on quality of information
The second hypothesis of the survey studies whether there is a meaningful change on quality of information as a result of convergence on national accounting standards to international standards.The implementation of the Kolmogorov-Smirnov yields Z = 0.668 with P-value = 0.764, which means the data associated with information quality are normally distributed.In addition, the implementation of tstudent test yields t=1.152 with P-value = 0.293, which means there is not any statistical difference on quality of information before and after convergence of accounting standards.

The third hypothesis: The relationship between quality of information and FDI
The last hypothesis of this survey is associated with the relationship between quality of information and FDI.The implementation of Pearson correlation ratio yields r = 0.78 with Sig.= 0.022, which means there was positive and meaningful relationship between quality of information FDI.

Conclusion
In this paper, we have presented an empirical investigation to study the effects of adaptation of international accounting standards on attract foreign investors.We have explained that the regulation was taken into account in 2006 and although there was some small change on foreign investment, statistically, there was not any meaningful relationship on foreign direct investment before and after accounting regulation.In addition, our survey has indicated that the accounting regulation had no impact on quality of information.Nevertheless, there was some positive and meaningful relationship between quality of information and foreign direct investment.The moral story is that as Dunning and Narula (2003) stated before, FDI may be a good catalyst for economic reform and should be promoted in developing countries.

Table 1
The summary of mean and standard deviation of FDI before and after convergence of accounting standard