Sunday, February 8, 2009

Home Bias and IAS

It seems that home-bias is a repetitive buzz word within the discussion of international diversification and understandably so. Covrig et. al.(2007) conducted a study on home bias, foreign mutual fund holdings and the adoption of International Accounting Standards(IAS) and how these constructs or variables interact. One of the positives resulting from adopting the IAS is the “enhanced ability to attract foreign capital, consistent with IAS reducing foreign investors’ home bias” (Covrig et. al., 2007, p. 2). Home-bias exists when investors are hesitant to invest internationally due to the high cost of information regarding these transactions. It would benefit firms to take actions to reduce home bias and attract foreign investment to improve investor diversification, lower investor risk, and reduce cost of capital (Covrig et. al., 2007). Covrig et. al. (2007) also posits that greater foreign investment increases firms’ investor base and increases share liquidity. Covrig et. al. (2007) hypothesize that firms employing IAS have higher foreign ownership than those that only use local accounting standards. Their sample size is more than 25,000 observations across 29 countries from 1999-2002. Their analysis does in fact bolster their hypothesis that “firms adopting IAS in poorer information environments, or firms with lower investor visibility, have higher levels of foreign mutual fund investment” (Covrig et. al. , 2007, p. 4).
Covrig, V.M., Defond, M.L., and Hung, M. (2007). Home bias, foreign mutual fund holdings, and the voluntary adoption of international accounting standards. Retrieved January 28, 2009 from EBSCOhost Database.

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