Financial Reporting Standards and Global Capital Market Integration Processes

Abstract

This paper investigates the complex, non-linear relationship between the adoption of International Financial Reporting Standards (IFRS) and the integration of
global capital markets, challenging the prevailing assumption of a direct, positive
causal link. While existing literature predominantly emphasizes harmonization benefits, this research introduces a novel analytical framework that reconceptualizes integration as a multi-dimensional process influenced by institutional complementarities, enforcement heterogeneity, and the interpretive flexibility of accounting standards themselves. Drawing on concepts from institutional theory, network analysis,
and the sociology of translation, we argue that the global convergence of reporting
standards does not mechanically produce integrated markets but instead triggers
a series of adaptations, translations, and strategic responses by market actors that
can, paradoxically, reinforce certain forms of fragmentation even as they reduce
formal diversity. The methodology employs a mixed-methods design, combining a
longitudinal analysis of cross-border equity flows and co-movement patterns across
42 jurisdictions from 1995 to 2004 with a qualitative, interpretive analysis of regulatory discourse and corporate narratives surrounding IFRS implementation. Our
findings reveal three counterintuitive dynamics: first, that mandatory IFRS adoption in jurisdictions with weak enforcement regimes can increase information asymmetry for foreign investors, acting as a temporary barrier to integration; second,
that the very flexibility principles within IFRS (e.g., fair value options) can be
deployed to sustain nationally distinct reporting profiles, creating a ’harmonized
diversity’; and third, that integration is most pronounced not in equity markets per
se, but in the secondary market for corporate debt, suggesting that standards affect
different asset classes in fundamentally different ways. The study concludes that
the process of global capital market integration is better understood as a dialectic
between standardization and differentiation, where accounting standards are not
merely technical instruments but sites of institutional contestation. This reframing
offers original insights for policymakers, standard-setters, and scholars, moving beyond the binary debate of ’adopt versus not adopt’ to consider the conditional and
often unintended consequences of financial reporting harmonization.