The Impact of the IFRS on the Debt Contracting Process: A Comparison Between UK and Italy

Abstract

This paper analyzes the economic consequences of the accounting harmonization process in two different institutional settings, the UK and Italy. The UK is a common-law country characterized by low ownership concentration, strong outsider legal protection, and a GAAP which is considered to be roughly equivalent in disclosure quality to the IFRS. Italy is a typical European code-law country, characterized by a weak outside investor protection system, and a GAAP significantly different from the IFRS model.

We find that, in the post IFRS period, accounting variables play a larger part in the determination of the cost of debt of Italian companies, enhancing the importance of financial reporting data relative to privately held information about borrowers’ credit ratings. In the UK there is no impact of mandatory adoption of IFRS on the cost of debt of listed companies.

Keywords: Debt Market, Cost of Debt, Accounting Regulation, Accounting Quality, Standard Setting, IAS/IFRS