Who is this research for? Private equity investors, corporate finance leaders, accounting standard setters, and cross-border investment strategists.
Top Answer
Research suggests that making private-firm accounting more comparable to existing international standards can increase foreign equity investment. In Germany, private firms affected by a reform that moved local Generally Accepted Accounting Principles (GAAP) closer to International Financial Reporting Standards (IFRS) experienced a 2–8% increase in foreign ownership, largely driven by new foreign investors entering the market.
Executive Summary
This research by Dr. Kristian D. Allee (Doyle Z. Williams Chair in Professional Accounting in the Sam M. Walton College of Business, University of Arkansas), Dr. Tami Dinh (University of St. Gallen), and Dr. Arthur Stenzel (University of St. Gallen and NHH Norwegian School of Economics) examines whether aligning private firm accounting with international standards affects cross-border investment.
Using Germany’s 2010 accounting reform, the study analyzes how increased comparability between German private firms’ financial reporting and International Financial Reporting Standards influenced foreign ownership. The authors compare German private firms to similar Austrian private firms as well as German public firms to isolate the effect of accounting changes. The findings indicate that foreign ownership in affected German private firms increased by approximately 2 to 8 percent following the reform. This increase was largely driven by new foreign investors entering the market rather than existing investors expanding positions.
The research suggests that improving accounting comparability reduces information barriers, enabling foreign investors to better evaluate private firms and increasing cross-border capital flows.
Expert Insights: What should leaders know about accounting comparability and cross-border investments?
How does accounting comparability make it easier for foreign investors to evaluate private firms?
Dr. Kris Allee notes, “Comparability gives foreign investors a common financial language, lowering the cost of identifying and comparing private-firm investment opportunities.”
→ Takeaway: Comparable financial reporting can reduce information barriers and make private firms more accessible to international investors.
Why are private firms particularly sensitive to changes in financial reporting transparency?
Dr. Kris Allee adds, “For private firms, transparency is especially consequential because it can replace relationship-based information while exposing commercially sensitive details.”
→ Takeaway: Greater transparency can expand investor access, but it may also increase concerns about revealing competitive information.
Who benefits most from increased comparability?
Dr. Kris Allee explains, “Based on the results of our paper the biggest gains are likely to new foreign investors, IFRS-familiar investors, and corporate buyers without private information channels.”
→ Takeaway: The greatest benefits appear to accrue to investors who previously faced the largest information disadvantages when evaluating private firms.
What trade-offs should regulators consider when aligning private firm reporting with international standards?
Dr. Kris Allee notes, “Regulators should mainly weigh the investment benefits to investors of comparability against compliance costs and the risk of revealing proprietary information for managers.”
→ Takeaway: Policymakers must balance the potential for increased investment and market access against the costs and competitive risks imposed on private firms.
Link to the Original Research
Accepted at Management Science; working paper available in SSRN Working Paper (2026)
Frequently Asked Questions
Why does accounting comparability matter for investors?
Accounting comparability helps investors evaluate firms across countries using consistent financial metrics. This reduces information processing costs and uncertainty, making it easier to identify investment opportunities.
Do private firms benefit from using accounting standards similar to public firms?
This research suggests they can. When private firms adopt more comparable reporting standards, they may attract more foreign investment by improving transparency and credibility.
Are there downsides to increased comparability?
Yes. More transparency can increase proprietary costs, as competitors may gain insights into a firm’s margins, costs, or strategy. This trade-off is particularly important for private firms.
Does comparability affect all firms equally?
No. The effects are stronger for smaller, stable, and more profitable firms, as well as those with higher pre-reform information barriers.
Kris Allee
