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

See all articles by André Aroldo Freitas De Moura

André Aroldo Freitas De Moura

FUCAPE Business School

Aljaohra Altuwaijri

Al-Imam Muhammad Ibn Saud Islamic University - College of Economics and Administrative Sciences

Jairaj Gupta

University of Birmingham

Date Written: February 6, 2020

Abstract

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

De Moura, André Aroldo Freitas and Altuwaijri, Aljaohra and Gupta, Jairaj, Did Mandatory IFRS Adoption Affect the Cost of Capital in Latin American Countries? (February 6, 2020). Journal of International Accounting, Auditing and Taxation, 2020, Available at SSRN: https://ssrn.com/abstract=3533493

André Aroldo Freitas De Moura

FUCAPE Business School ( email )

Fernando Ferrari Avenue, 1358
Goiabeiras
Vitória, Espirtio Santo 29075-010
Brazil

Aljaohra Altuwaijri

Al-Imam Muhammad Ibn Saud Islamic University - College of Economics and Administrative Sciences ( email )

Saudi Arabia

Jairaj Gupta (Contact Author)

University of Birmingham ( email )

Edgbaston, Birmingham B15 2TT
United Kingdom
00-44-7795904913 (Phone)

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