Title: Foreign direct investments affecting accounting quality in transitional economies of Europe

Authors: Sanna Hämäläinen; Minna Martikainen

Addresses: School of Business, Lappeenranta University of Technology, P.O. Box 20, FI-53851 Lappeenranta, Finland ' Hanken School of Economics, P.O. Box 479, FI-00101 Helsinki, Finland

Abstract: This paper examines the effect of foreign direct investments (FDIs) on financial reporting quality in transitional economies. When moving from a planned economy towards a market-based economy, firms need to be able to attract more non-governmental financing. While still the quality of institutional structures is low, non-governmental financing comes in the form of FDI. Therefore, in a changed environment firms need to produce higher quality financial reporting to acquire capital. Accounting quality is measured as conditional conservatism, i.e., asymmetric recognition of gains and losses. In our study data from 12 transitional economies in Central and Eastern Europe is analysed. The results indicate that investment freedom, and freedom from corruption increase earnings quality. Moreover, the results show that high level of FDIs is associated with high conditional conservatism indicating that FDIs increase the incentives for high quality financial reporting, especially when the free flow of foreign capital is limited.

Keywords: conditional conservatism; transitional economies; foreign direct investment; FDI; investment environment; institutional quality; accounting quality; Central and Eastern Europe; CEE; financial reporting; corruption; earnings quality.

DOI: 10.1504/IJBIR.2015.069139

International Journal of Business Innovation and Research, 2015 Vol.9 No.3, pp.295 - 310

Published online: 30 Apr 2015 *

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