Does Mandatory Adoption of International Financial Reporting Standards in the European Union Reduce the Cost of Equity Capital?

50 Pages Posted: 28 Mar 2008 Last revised: 9 Mar 2011

See all articles by Siqi Li

Siqi Li

Santa Clara University - Leavey School of Business

Date Written: September 25, 2009

Abstract

This study examines whether the mandatory adoption of International Financial Reporting Standards (IFRS) in the European Union (EU) in 2005 reduces the cost of equity capital. Using a sample of 6,456 firm-year observations of 1,084 EU firms during the 1995 to 2006 period, I find evidence that, on average, the IFRS mandate significantly reduces the cost of equity for mandatory adopters by 47 basis points. I also find that this reduction is present only in countries with strong legal enforcement, and that increased disclosure and enhanced information comparability are two mechanisms behind the cost of equity reduction. Taken together, these findings suggest that while mandatory IFRS adoption significantly lowers firms’ cost of equity, the effects depend on the strength of the countries’ legal enforcement.

Keywords: International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), cost of equity capital

JEL Classification: G15, G38, K22, M41, M44, M45, M47

Suggested Citation

Li, Siqi, Does Mandatory Adoption of International Financial Reporting Standards in the European Union Reduce the Cost of Equity Capital? (September 25, 2009). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1113353 or http://dx.doi.org/10.2139/ssrn.1113353

Siqi Li (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

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