Cross-Border Investments in Private Firms: The Benefits of Comparability for Foreign Investors

We examine whether the mandated convergence of local German Generally Accepted Accounting Principles with International Financial Reporting Standards (IFRS) increases investment by foreign equity investors in German private firms. Exploiting a large-sample quasi-experimental setting, we document an average foreign ownership increase of 2%–8% in firms affected by the accounting reform compared with our unaffected control firms. Based on our identification strategy, using both the unique setting and accounting system comparability (that is, the comparability of cash flows in the next period), we show that increased comparability can minimize challenges faced by investors in private firms. We also find that those investors more familiar with IFRS benefit more from the increased accounting comparability. In addition, the effect is stronger for firms with higher proprietary costs before the mandatory accounting comparability increase. Our findings are robust to alternative matching procedures and a placebo test. We provide evidence for ongoing discussions on the costs of separate accounting standards for private firms. We show significant benefits when private firms’ accounting becomes more (and not less) comparable to that of public firms.

This paper was accepted by Eric So, accounting.

Funding: K. D. Allee acknowledges the support of the Doyle Z. Williams Chair in Professional Accounting at the Sam M. Walton College of Business.

Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.08765.