Did Mandatory IFRS Adoption Affect the Cost of Capital in Latin American Countries?
Journal of International Accounting, Auditing and Taxation, 2020
38 Pages Posted: 6 Mar 2020
Date Written: February 6, 2020
This study investigates whether mandatory adoption of International Financial Reporting Standards (IFRS) has affected the long-term cost of equity and debt in Latin America, where the enforcement of accounting standards and investor protection mechanisms are weak in comparison to developed nations. Analyzing a sample of firms from Argentina, Brazil, Chile, Mexico, and Peru, we show that mandatory IFRS adoption led to reduction in the cost of equity even after controlling for firm-level reporting incentives. Test results also show that the cost of debt was reduced significantly after the IFRS adoption. Our results suggest that enhanced disclosure and comparability stemming from IFRS in comparison to previous domestic accounting standards helped to mitigate the information asymmetry problem, and resulted in positive economic consequences for Latin American firms.
Keywords: IFRS, cost of equity, cost of debt, investors, debt holders, Latin America
JEL Classification: G14, M40
Suggested Citation: Suggested Citation