Relationship between Cost of Capital and International Accounting Standard for Swiss Companies

Abstract

The relationship between disclosure and a firm's cost of capital is an important topic in contemporary accounting theory. Theoretical prediction suggests that greater disclosure should lower the firm's cost of capital trough the reduction of information asymmetries. In this paper I empirically analyze the impact on variables such as bid-ask spread, trading liquidity and return volatility from the adoption of an international accounting standard that is indicated as a choice to increase disclosure to shareholders. The three variables are used as proxy for the asymmetric component of the firm's cost of capital. The hypotheses made are that the adoption of an international accounting standard determines a decrease in the bid-ask spread, an increase in the trading liquidity and a significant impact on the return volatility. For a cross sectional sample of 159 Swiss listed companies, I find a negative and significant association with the bid-ask spread, a positive and significant association with the return volatility and an insignificant association with the trading liquidity from the adoption of an international accounting strategy. The magnitude is such that the firm that adopts an IAS enjoys of an average reduction of more than 45% in the bid-ask spread. This finding persists even after controlling for omitted variables and for simultaneous effect. The findings on trading liquidity are inconsistent with the hypothesis probably because the effect coming from an IAS adoption is hidden from the higher effect coming from the state of economic cycle.