International Financial Reporting Standards, institutional infrastructures, and implied cost of equity capital around the world

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Original languageEnglish
Pages (from-to)469-507
Journal / PublicationReview of Quantitative Finance and Accounting
Issue number3
Online published23 Feb 2013
Publication statusPublished - Apr 2014


Using a sample of 21,608 firm-years from 34 countries during 1998-2004, this study evaluates the impact of voluntary adoption of the International Financial Reporting Standards (IFRS) on a firm's implied cost of equity capital. We find that the implied cost of equity capital is significantly lower for the full IFRS adopters than for the non-adopters even after controlling for potential self-selection bias and firm-specific and country-level factors that are known to affect the implied cost of capital. This result holds irrespective of institutional infrastructure determining a country's governance and enforcement mechanisms. We also find that the implied cost of equity capital decreases with the efficacy of institutional infrastructure. Moreover, we provide evidence that the cost of capital-reducing effect of IFRS adoption is greater when IFRS adopters are from countries with weak institutional infrastructures than when they are from countries with strong infrastructures. The above results are robust to a battery of sensitivity checks. © 2013 Springer Science+Business Media New York.

Research Area(s)

  • Cost of equity capital, Enforcement mechanism, Governance mechanism, Institutional infrastructure, International financial reporting standards (IFRS)

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