The Effect of IFRS Adoption on Foreign Investment in the Japanese Equity Market

This study investigates the effects of International Financial Reporting Standards (IFRS) adoption on foreign investment in the Japanese equity market. Previous research suggests that a positive relationship between IFRS adoption and foreign investment typically emerges when a country meets specific conditions, such as a strong regulatory environment or credible improvements in reporting uniformity. We contribute to this literature by re-examining the effects of voluntary IFRS adoption on the foreign shareholding ratio of Japanese companies from 2010 to 2023. Our analysis explicitly controls for the impact of reduced cross-shareholdings and increased share buybacks—structural factors likely to affect the capacity for foreign ownership. Using a difference-in-differences approach combined with propensity score matching to mitigate endogeneity, we compare 168 voluntary IFRS adopters against a control group of non-adopters. Unlike previous studies that reported no significant relationship in Japan—largely attributable to different denominator constructions for foreign shareholding ratios or shorter observation periods—our approach demonstrates that IFRS adoption significantly increases foreign investment over an extended horizon.