Mandatory IFRS adoption and the cost of Equity Capital. Evidence from Spanish Firms

David Castillo-Merino,Neus Orgaz-Guerrero,Carlota Menéndez-Plans

doi:10.3926/ic.491

Abstract

Purpose: The main objective of this paper analyses the effects of mandatory International Financial Reporting Standards (IFRS) adoption by Spanish firms in 2005 on the cost of equity capital.

Highlights

Beneficial capital-market effects from enhancing quality and comparability of accounting information are a major issue in today’s accounting research.Recent research in this field has demonstrated that firms from countries with more extensive disclosure requirements, stronger securities regulation, and stricter enforcement mechanisms have a significantly lower cost of capital (Hail & Leuz, 2006).The belief that higher mandate disclosure of accounting information by firms should reduce its cost of equity capital has led many countries to adopt International Financial Reporting Standards (IFRS) as a new and unique set of accounting standards
Most of previous studies have found some evidence that voluntary IFRS adoption reduces the cost of capital (Leuz & Verrecchia, 2000; Daske, 2006; Barth, Landsman & Lang, 2008; Karamanou & Nishiotis, 2009; Hai,l Leuz & Wysocki, 2010), but there is little empirical evidence supporting this relationship for mandatory IFRS adoption, and they show to some extent different results
This paper explores the impact of mandatory IFRS adoption on the cost of equity capital of Spanish firms

Summary

Introduction

Beneficial capital-market effects from enhancing quality and comparability of accounting information are a major issue in today’s accounting research. The cost equity effects of mandatory IFRS adoption According to previous theoretical and empirical evidence in this field, mandated disclosures, as the legal requirement of the International Financial Reporting Standards (IFRS) adoption in the EU, can reduce the cost of capital through at least two different paths: increasing the quality of financial disclosure and enhancing information comparability. In the case of the mandatory IFRS adoption in the EU, the shift to a new accounting regulation has been accompanied with several institutional changes, such as the Financial Services Action Plan (FSAP) in 1999 or the series of directives to improve financial market regulation (for instance, insider trading regulation) These institutional changes can modify firms’ reporting incentives leading to better quality disclosures and, to a lower cost of capital. We have included the IFRS indicator variable to our former model to isolate the effect of the shift to a new accounting regulation on stocks’ expected returns

Sample selection

Results

Correlation between test variables

Conclusions