Changes to financial reporting when domestic funding substitutes foreign funding: evidence from international sanctions to Russia

Internal Seminar for Researchers

Abstract: Starting in 2014, many Western countries, including the US and the EU, imposed sanctions to Russia. These sanctions created barriers to foreign financing for Russian firms and generated a large exogenous shock to corporate funding. The Russian government reacted facilitating the access of Russian firms to local debt financing. We study how this shock affected financial reporting, and, in particular, conditional conservatism, which is expected to facilitate debt financing in an arm’s length setting. While there is prior evidence on how the entry of foreign investors affects financial reporting, there is no prior research on how financial reporting changes when foreign investment is either forbidden or discouraged. Our evidence shows that affected Russian firms decreased their conditional conservatism after the sanctions.