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RESEARCH PRODUCT

Do Cross-Country Differences in Accounting Conservatism Explain Variations in the Degree of Investor Diversification?

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We show that the level of conditional accounting conservatism of foreign markets is significantly and positively associated with decisions to diversify portfolios internationally. This positive association could be either because conditional conservatism per se is attractive to international investors, or because the un-modelled factors that attract foreign investors to a country also cause these countries to adopt conditionally conservative accounting practices. However, if conditional conservatism serves to alleviate foreign investors’ concerns related to insiders having asymmetric access to information then one would also expect the chosen mode of entry into a foreign market (as foreign portfolio or direct investor) to be sensitive to the level of conditional conservatism. We find evidence supportive of this expectation.