The Impact of Voluntary Adoption of IFRS on the Earning Quality and the Cost of Capital: An Empirical Study

Abstract

The objective of this research is to investigate the direct relationship between the voluntary adoption of IFRS and cost of capital. Also, it investigates the indirect effect of earning quality on the voluntary adoption of IFRS and cost of capital. These relationships have been a very important issue and topic for researcher since IFRS became mandatory in EU at a beginning of 2005. Therefore, the aim of this study is to explore the nature of relationship between voluntary adoption of IFRS on the cost of capital and earning quality in Egypt and European firms. The sample is collected from the financial statements of 20 Egyptian and European firms as a secondary source of data. The 20 firms are classified into 10 adopting EAS in Egypt and the other 10 adopting IFRS in Europe from 2006 to 2015. The sample was from a range of industrial sectors. The results show that there is a negative relationship between voluntary adoption of IFRS and cost of capital. Costs of capital reduced in firms adopt EAS more than IFRS. Also, earning quality is not considered to be a mediator because it does not affect the relation of voluntary adoption of IFRS and cost of capital. However, there is a significant positive relationship between voluntary adoptions of IFRS on earning smoothness and accrual quality. Also, there is a negative relationship between earning quality and cost of capital.

Keywords: International Financial Reporting Standards (IFRS), Cost of Capital, Voluntary Adoption of IFRS, Earning Quality (EQ), and Egyptian Accounting Standards (EAS