Moderating effect of IFRS adoption on accounting conservatism and cost of equity: evidence from Canadian ESG data

Abstract

PurposeThe purpose of this paper is to examine the moderating effect of International Financial Reporting Standards (IFRS) adoption on the relationship between accounting conservatism and the cost of equity in Canadian environmental, social, and corporate governance (ESG) firms.Design/methodology/approachPanel data was collected using the Thomson Reuters ASSET4 database on a sample of 284 Canadian ESG companies over the period 2007–2019.FindingsThe results obtained show a negative relationship between conditional conservatism and the cost of equity. The authors also find a negative relationship between unconditional conservatism and the cost of equity. In addition, IFRS adoption moderates the relationship between accounting conservatism and the cost of equity in Canadian ESG firms.Research limitations/implicationsFuture studies may extend the coverage of the study by including other countries and other sectors.Practical implicationsThe results imply that prudent accounting signals information to investors about the quality of a company’s current and future earnings. The rates of return required by investors may be higher for conservative reporting companies that are more susceptible to opportunistic management discretion.Originality/valueAlthough the previous literature has studied the direct correlation between accounting conservatism and the cost of equity, the present work focuses on examining the direct association between accounting conservatism and the cost of equity through the moderator effect of IFRS, which has not been widely used in studies of accounting conservatism until now.