Financial Reporting in Emerging Capital Markets: Characteristics and Policy Issues.

The Institute of International Finance, a Washington-based research group, estimates that the flows of private capital into the world's emerging economies will reach $231 billion in 1997. This figure does not include the flows of official capital to these countries, such as loans from the World Bank and the Asian Development Bank. For a group of countries whose political and economic importance has grown dramatically over the past two decades, relatively little has been written about financial reporting in these emerging economies. In this study, we analyze the characteristics of financial reporting in ‘Emerging Capital Markets’ (ECMs). ECMs refer to markets for long-term corporate securities in less-developed and transitional economies. Financial reporting has been increasingly viewed as a vital infrastructure for the growth of emerging markets. As such, increasing attention must be devoted to how the quality of financial reporting in these markets could be enhanced. We suggest that information availability, reliability and comparability provide useful criteria for evaluating and comparing the state of financial reporting in ECMs. Analysis revealed significant financial reporting diversity in ECMs with respect to these three criteria. Subsequent discussion of the regulatory options available to these markets also highlight the complexity and multifaceted nature of the relevant policy issues. We conclude by identifying areas of policy research in regard to financial reporting in ECMs. These research issues include the merits of alternative approaches to accounting regulation and the value of achieving international comparability of financial reporting in those markets.