Whose cost of equity capital reduces after IFRS convergence and why? Heterogeneity evidence from Chinese stock market

Abstract

This paper extends the studies of IFRS convergence in China by analysing heterogeneity with respect to the reduction in the cost of equity capital, and investigating the potential causes of that heterogeneity using the sample of listed A-share companies of 2004–2010. This paper finds that state-owned companies have experienced a greater cost reduction than non-state-owned companies. The further analyses find that institutional settings and management incentives are critical driving factors for state-owned companies benefiting more from IFRS convergence. These findings not only enrich the literature by providing direct evidence to reveal and explain the heterogeneity in the reduction in the cost of equity capital caused by IFRS convergence in China, but also contribute to the appraisal of the convergence. To implement IFRS-converged accounting standards in transitional economies such as China, it is important to strengthen the development of external marketisation and the governance of incentives for earnings management.