Cost of Equity Effects from Mandatory IFRS Adoption, Legal and Financial Institutions, and Auditor Quality Dimensions
Cost of Equity Effects from Mandatory IFRS Adoption, Legal and Financial Institutions, and Auditor Quality Dimensions

Author: Raymond Leung

Publisher:

Published: 2015

Total Pages: 49

ISBN-13:

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This study examines if cost of equity can be negatively affected by mandatory IFRS adoption. Also, this paper explores how cost of equity effects differ depending on different national level of governance mechanisms because financial reporting incentives are influenced by both accounting regulation and institutional factors. While I document that mandatory IFRS adoption negatively influences cost of equity beyond the transition period, however, such observed results may also be attributed to the concurrent evolving effects from legal quality and enforcement, stock market development and auditor quality. Given that most cross-country national governance studies only apply a set of dated and static indices; I argue that using, time-varying and cross-sectional institutional indices can provide better measurement of both individual and interactive effects on firm-level cost of equity. While average legal mechanisms are an important factor, the results show that increase (decrease) in regulatory quality (legal enforcement) interacts with post-IFRS period significantly (insignificantly) and associate with lower (higher) ex-ante cost of equity. Moreover, I find that countries with different legal origins systematically associate with different dimensions of stock market development to reduce the cost of equity. Also, auditor quality is effective to reduce information asymmetry, but it highly depends on national legal quality and enforcement. Finally, I document that when cost of equity is lowered, it benefits firms with higher value.

IAS/ IFRS
IAS/ IFRS

Author: Vera Palea

Publisher: FrancoAngeli

Published: 2006

Total Pages: 132

ISBN-13: 9788846480880

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The Effects of IFRS Adoption in the European Union on Banks' Cost of Equity
The Effects of IFRS Adoption in the European Union on Banks' Cost of Equity

Author: Vera Palea

Publisher:

Published: 2019

Total Pages: 18

ISBN-13:

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The effects of disclosure level on the cost of equity are a matter of considerable interest and importance to the financial reporting community. Economic theory indeed claims that commitment to increased level of disclosure reduces the cost of capital component that arises from information asymmetries. Accordingly, this paper investigates the effects of IFRS adoption in Europe on the cost of equity for the bank industry. In doing so, it performs an event study, which isolates the effects of accounting changes on the cost of capital from institutional and enforcement mechanisms. This study shows that IFRS adoption has exerted, on average, a positive effect on the cost of capital for the bank industry at least in the very short run. Firms adopting IFRS seem to have experienced a lower cost of equity in the period immediately subsequent the release of financial reporting according to the new accounting standard set.

Signalling Under Uncertainty
Signalling Under Uncertainty

Author: Osman Ghani

Publisher:

Published: 2019

Total Pages: 59

ISBN-13:

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This paper examines the liquidity, Tobin's Q, and cost of equity effects from voluntary and mandatory IFRS adoption. In contrast to prior work, we focus on the firm level heterogeneity in the economic consequences, recognising that the level of uncertainty avoidance (UAI) in a country will influence the economic consequences derived from implementing the new standards. Country level uncertainty avoidance is predicted to lead to lower liquidity and Tobin's Q, and a higher cost of equity for mandatory adopters in higher UAI countries, while higher UAI is expected to benefit voluntary adopters in terms of higher liquidity and Tobin's Q, and a lower cost of equity. To test these predictions, we partition the firms into non-adopters, voluntary adopters, and mandatory adopters and also classify firms according to the change in their financial reporting quality. We analyse whether capital markets effects are different across the various groups based on the level of uncertainty avoidance in the host country. We find that prior to the mandatory adoption of IFRS by the EU member states, voluntary adopters in higher UAI countries benefited from increased liquidity and Tobin's Q, compared to identical firms in lower UAI countries, mandatory adopters and non-adopters. However, we find that this result is not persistent post the EU mandate, and that UAI influences both mandatory and voluntary adopters in a similar manner post 2005. The results from the cost of equity analysis suggest that market participants treat mandatory and voluntary adopters in an almost identical manner and that a higher UAI leads to both groups of firms exhibiting a reduction in their cost of equity. Our findings imply that uncertainty avoidance is able to explain part of the heterogeneity exhibited in the capital market outcomes between firms and across countries that have adopted IFRS.

IFRS Adoption and Financial Reporting Quality
IFRS Adoption and Financial Reporting Quality

Author: Habeeb Mohamed Nijam

Publisher:

Published: 2016

Total Pages: 14

ISBN-13:

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Conventional and commonly held wisdom with respect to the adoption of International Financial Reporting Standards (IFRS) is that they lead to improved financial reporting quality and comparability and thereby favorable economic consequences. There are however contradicting evidences disproving this conventional wisdom or rejecting its gross generalization over the entire jurisdictions harmonizing on IFRS. Driven by this fact, quests for knowledge about the dynamics and contexts that lead to differential effects of IFRS get momentum. In an attempt to explore the insight into the effects of international accounting harmonization by way of IFRS adoption, this paper reviews selected literatures on consequences of IFRS adoption. This review discusses some empirical evidences that have been reported in various countries that include Europe, USA, United Kingdom, Germany, Spain, Norway, Greece, Poland, Belgian, France, Italy, Turkey, United Arab Emirates (UAE), Kuwait, Jordan, China, Malaysia, Australia, Hong Kong, New Zealand, Kenya and Nigeria. Our review focuses on the aspects of value relevance, disclosure quality, cost of capital, earning management and financial statement impact due to the IFRS adoption. This review reveals that economic consequences of IFRS adoption significantly differ across jurisdictions though being its impact reported to be positive in majority of cases. There are also notable number of studies that report indifferent and or negative effects of IFRS adoption. When IFRS studies report mixed evidence with respect to value relevance of book value of equity and earing, book value of equity supersedes the earning parameters. IFRS are found to supersede many other domestic financial reporting standards in terms of volume and quality of disclosures in financial statements. This review also obtains that IFRS' impact on the reduction of cost of capital depends on financial reporting incentives, law enforcement, types of legal systems and various other country and capital market specific characteristics. Further, though there are some evidences to the contrary, the quality of earnings reported under IFRS has been established to be superior to that under other local standards.

Earnings Quality
Earnings Quality

Author: Jennifer Francis

Publisher: Now Publishers Inc

Published: 2008

Total Pages: 97

ISBN-13: 1601981147

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This review lays out a research perspective on earnings quality. We provide an overview of alternative definitions and measures of earnings quality and a discussion of research design choices encountered in earnings quality research. Throughout, we focus on a capital markets setting, as opposed, for example, to a contracting or stewardship setting. Our reason for this choice stems from the view that the capital market uses of accounting information are fundamental, in the sense of providing a basis for other uses, such as stewardship. Because resource allocations are ex ante decisions while contracting/stewardship assessments are ex post evaluations of outcomes, evidence on whether, how and to what degree earnings quality influences capital market resource allocation decisions is fundamental to understanding why and how accounting matters to investors and others, including those charged with stewardship responsibilities. Demonstrating a link between earnings quality and, for example, the costs of equity and debt capital implies a basic economic role in capital allocation decisions for accounting information; this role has only recently been documented in the accounting literature. We focus on how the precision of financial information in capturing one or more underlying valuation-relevant constructs affects the assessment and use of that information by capital market participants. We emphasize that the choice of constructs to be measured is typically contextual. Our main focus is on the precision of earnings, which we view as a summary indicator of the overall quality of financial reporting. Our intent in discussing research that evaluates the capital market effects of earnings quality is both to stimulate further research in this area and to encourage research on related topics, including, for example, the role of earnings quality in contracting and stewardship.

Does Mandatory Adoption of International Financial Reporting Standards in the European Union Reduce the Cost of Equity Capital?
Does Mandatory Adoption of International Financial Reporting Standards in the European Union Reduce the Cost of Equity Capital?

Author: Siqi Li

Publisher:

Published: 2011

Total Pages: 50

ISBN-13:

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This study examines whether the mandatory adoption of International Financial Reporting Standards (IFRS) in the European Union (EU) in 2005 reduces the cost of equity capital. Using a sample of 6,456 firm-year observations of 1,084 EU firms during the 1995 to 2006 period, I find evidence that, on average, the IFRS mandate significantly reduces the cost of equity for mandatory adopters by 47 basis points. I also find that this reduction is present only in countries with strong legal enforcement, and that increased disclosure and enhanced information comparability are two mechanisms behind the cost of equity reduction. Taken together, these findings suggest that while mandatory IFRS adoption significantly lowers firms' cost of equity, the effects depend on the strength of the countries' legal enforcement.

The Impact of Voluntary Adoption of IFRS on the Earning Quality and the Cost of Capital
The Impact of Voluntary Adoption of IFRS on the Earning Quality and the Cost of Capital

Author: Dalia Ezzat

Publisher:

Published: 2018

Total Pages:

ISBN-13:

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The objective of this research is to investigate the direct relationship between the voluntary adoption of IFRS and cost of capital. Also, it investigates the indirect effect of earning quality on the voluntary adoption of IFRS and cost of capital. These relationships have been a very important issue and topic for researcher since IFRS became mandatory in EU at a beginning of 2005. Therefore, the aim of this study is to explore the nature of relationship between voluntary adoption of IFRS on the cost of capital and earning quality in Egypt and European firms. The sample is collected from the financial statements of 20 Egyptian and European firms as a secondary source of data. The 20 firms are classified into 10 adopting EAS in Egypt and the other 10 adopting IFRS in Europe from 2006 to 2015. The sample was from a range of industrial sectors. The results show that there is a negative relationship between voluntary adoption of IFRS and cost of capital. Costs of capital reduced in firms adopt EAS more than IFRS. Also, earning quality is not considered to be a mediator because it does not affect the relation of voluntary adoption of IFRS and cost of capital. However, there is a significant positive relationship between voluntary adoptions of IFRS on earning smoothness and accrual quality. Also, there is a negative relationship between earning quality and cost of capital.