The effects of ISA adoption and its interaction with IFRS on capital flows: A cross country study

Abstract

This paper investigates the effects of the adoption of International Standards on Auditing (ISAs) and its interaction with International Financial Reporting Standards (IFRSs) on capital flows (foreign direct investment) at a cross-country level. Foreign direct investment (FDI) plays a significant role in the economy of any country (particularly, in developing and emerging countries), which are regarded as attractive investment locations. Based on the information risk minimisation theoretical framework and drawing data from reliable secondary sources, different regression analyses are used to generate empirical findings to support the hypotheses. Findings from this study, for the first time, provide empirical evidence that support the theoretical prediction that ISAs, has a significant and positive impact on FDI. Secondly, when ISAs interact with IFRSs, the financial reporting environment strengthens and as result has more significant impact on FDI than IFRS alone.