Not all markets are created equal and at some point every powerhouse had to begin as a smaller underdeveloped one. The textbook defines emerging capital markets as, “capital markets in countries with less developed and transitional economies” (Saudagaran & Smith, 2013, p. 6-215). These types of markets usually have high levels of government involvement, yet not a high level of accounting regularity.
As emerging capital markets are attempting to grow and become a sustainable option, they must overcome the challenges of a freshman market. “A major challenge of the investment environment in emerging markets is the struggle of investors to obtain quality information and detailed insights on their potential investment opportunities” (Hess, Moser, & Narayanamurthy, 2017, p. 291). Potential investors look for information to make financial decisions and a lack of quality information limits the decision-making process. This will minimize the number of investors willing to enter into an emerging capital market, thus producing an antagonist to growth in the market.
One approach to increase the amount of high-quality financial information is to establish a set of accounting and auditing standards that regulatory bodies continually oversee. “Audited financial statements that provide accurate, high-quality financial reports in a timely manner are critical to the development of capital markets, especially in emerging capital markets” (Khanna & Khosla, 2019, p. 21). Audited financial statements are considered more reliable and comparable as they must follow the same reporting standards. This added benefit provides potential international investors with the information necessary to invest in an emerging capital market.
To add to the approach above, an emerging capital market would need a set of common reporting standards. “The need for a common international accountancy language is crucial particularly for emerging economies whose needs for internationalized capital markets are rather decisive” (Hessayri & Saihi, 2018, p. 3). An international set of reporting standards, like IFRS, would allow emerging capital markets to compete on the same level as other larger markets. This would alleviate their desperate need for the availability of high-quality and reliable financial information.
References:
Hessayri, M., & Saihi, M. (2018). Ownership dynamics around IFRS adoption: Emerging markets
context. Journal of Accounting in Emerging Economies, 8(1), 2-28. doi:http://dx.doi.org/10.1108/JAEE-01-2016-0002
Hess, D., Moser, R., & Narayanamurthy, G. (2017). Decision-making framework for investing in emerging
markets: A demonstration on the cocoa industry in ivory coast. World Journal of Science, Technology and Sustainable Development, 14(4), 290-309. doi:http://dx.doi.org/10.1108/WJSTSD-07-2016-0048
Khanna, K., & Khosla, U. G. (2019). HETROGENITY IN FINANCIAL REPORTING FREQUENCY:
INTERNATIONAL CAPITAL MARKET IMPLICATIONS. Prestige International Journal of Management & IT- Sanchayan, 8(1), 15-22. Retrieved from https://search.proquest.com/docview/2260096213?accountid=35796
Saudagaran, S. M. & Smith, L. M. (2013). International Accounting – A User Perspective 4th ed.
CCH Publishing.