European Accounting Harmonisation: Consequences of IFRS Adoption on Trade in Goods and Foreign Direct Investments

This paper focuses on the importance of accounting harmonisation on foreign activities at a macroeconomic level. International Financing Reporting Standards (IFRS) adoption is considered to reduce information costs among countries and is, therefore, an important way to encourage international trade in goods and investments. The fixed-effects vector decomposition (FEVD) procedure is used to estimate panel data characterised by the presence of time invariant variables in a gravity model approach. The results provide evidence that benefits exist in terms of trade in goods and FDI when IFRS are adopted. Furthermore, the positive effect of harmonising accounting standards on foreign activities in Europe differs in countries because of behavioural factors such as unfamiliarity aversion.