Cost-of-Capital Effects of IFRS Reporting in the United States

Abstract

This paper investigates the cost of equity capital effects of the SEC’s decision to eliminate the U.S. GAAP reconciliation requirement for cross-listed companies using IFRS. We use a sample of foreign domiciled firms that are cross-listed in the U.S. to conduct this investigation. We partition our cross-listed sample into three distinct groups: those firms that file using IFRS, those firms that file directly in U.S GAAP, and those that file in their own domestic GAAP with a 20-F reconciliation. For each of these groups we calculate cost of equity capital using a range of traditional measures and examine changes in these measures from 2006 to 2007 – the year that IFRS filers were no longer required to file a 20-F reconciliation. In order to ensure that the changes in the traditional cost of capital measures are not driven by firm fundamentals we control for firm specific factors when calculating an additional residual cost of capital measure. In contrast to prior research, we find evidence of a significant decline in residual cost of equity from 2006 to 2007 for IFRS filers in response to the elimination of U.S. GAAP reconciliations relative to both U.S. and non-U.S. local GAAP filers. Our results suggest that eliminating the reconciliation for IFRS filers does not weaken the information environment relative to U.S. GAAP.

Keywords: cost of capital, IFRS, US GAAP, convergence, harmonisation, 20-F reconciliation