Abstract
We examine the effect of mandatory International Financial Reporting Standards (IFRS) adoption on the cost of equity and liquidity of European banks and insurance companies. We find a statistically and economically significant decrease in cost of equity and a statistically and economically significant increase in liquidity of banks and insurance companies after IFRS adoption. In additional analyses, we find an increase in earnings volatility and a decrease in the risk-taking behavior of financial institutions after 2005. Further, we find that IFRS adopters with higher exposure to fair value accounting show a lower cost of equity.
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