Impact of Mandatory IFRS Adoption on the Financial Sector

Abstract

We examine the effect of mandatory International Financial Reporting Standards (IFRS) adoption on the cost of equity and liquidity of European banks and insurance companies. We find a statistically and economically significant decrease in cost of equity and a statistically and economically significant increase in liquidity of banks and insurance companies after IFRS adoption. In additional analyses, we find an increase in earnings volatility and a decrease in the risk-taking behavior of financial institutions after 2005. Further, we find that IFRS adopters with higher exposure to fair value accounting show a lower cost of equity.

Keywords: International Financial Reporting Standards (IFRS), cost of equity, liquidity, financial institutions

JEL Classification: G21, G22, M41