Mandatory IFRS Adoption and the Cost of Debt in Italy and UK

Abstract

This paper analyses the effect of the mandatory adoption of IFRS within the EU on the cost of corporate debt. In order to avoid the imprecision involved in a large scale cross country study, we examine the impact of IFRS in two very clearly different institutional settings, the UK and Italy. The UK is a common-law country characterised by strong enforcement and national GAAP which are equivalent to IFRS. Italy is a typical European code-law country, characterised by a weak outside investor protection system, and national GAAP significantly different from the IFRS model.

No IFRS effect is observed in the UK, consistent with it having standards which are close to IFRS. During the post IFRS period, in Italy more weight is placed on the accounting numbers to assess the cost of debt. We also find that accruals quality improves in Italy, thus suggesting that public financial reporting data is enhanced relative to privately held information about borrowers’ credit ratings.

Keywords: cost of debt; IAS/IFRS; mandatory adoption; standard setting