Disclosure and the Cost of Capital: Evidence from the Market's Reaction to Firm Voluntary Adoption of IAS

29 Pages Posted: 13 Oct 2009

See all articles by Irene Karamanou

Irene Karamanou

University of Cyprus - Department of Public and Business Administration

George Nishiotis

University of Cyprus-Faculty of Economics and Management-Department of Accounting and Finance

Abstract

Using a unique international setting where the effects of disclosure on firm value can be measured in a constant regulatory environment and in isolation of other confounding factors, this paper shows that firms can increase their value through their choice of accounting standards. Specifically, we document strong positive abnormal returns at the announcement of voluntary adoption of International Accounting Standards (IAS/IFRS) by a sample of international firms and an economically significant reduction in long-run returns, consistent with a reduction in the cost of capital. Consistent with these results we also document evidence of an upgrade in analyst recommendations after the IAS / IFRS adoption announcement and a reduction in the implied cost of capital. Finally, we find strong evidence that the documented abnormal returns are consistent with signaling and bonding benefits stemming from the reduction in asymmetric information. Our results highlight the importance of increased disclosure on minority shareholder protection and on corporate governance in general.

JEL Classification: M47, M44

Suggested Citation

Karamanou, Irene and Nishiotis, George P., Disclosure and the Cost of Capital: Evidence from the Market's Reaction to Firm Voluntary Adoption of IAS. Journal of Business Finance & Accounting, Vol. 36, Nos. 7-8, pp. 793-821, September/October 2009. Available at SSRN: https://ssrn.com/abstract=1486382 or http://dx.doi.org/10.1111/j.1468-5957.2009.02154.x

Irene Karamanou (Contact Author)

University of Cyprus - Department of Public and Business Administration ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
CYPRUS
+357 2 892471 (Phone)
+357 2 892460 (Fax)

George P. Nishiotis

University of Cyprus-Faculty of Economics and Management-Department of Accounting and Finance ( email )

Cyprus

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