IFRS Adoption on Corporate Cost of Capital

Title

Effect of IFRS Adoption on Corporate Cost of Capital

Authors

Avinash Arya, Priya Nagaraj, Hannah Wong

Abstract

The adoption of the International Financial Reporting Standards (IFRS) by over one hundred countries, which constitute 96 percent of the global GDP, since 2005 is the most significant development in accounting history. Supporters argue that an adoption of a single set of accounting rules could greatly reduce cost of capital in the global financial markets, which is especially beneficial for those in developing economies. The goal of this paper is to empirically examine the validity of such a claim.

Principal findings and recommendations

• Using the Fama and French four factor model and a sample of publicly traded Brazilian companies, the researchers find that companies that voluntarily adopted IFRS DID have lower cost of capital than their non-adopting counterparts.
• From the corporate standpoint, adopting IFRS eliminates the need for investors to familiarize themselves with drastically different country specific accounting regulations, reduces their learning curve, and facilitates their evaluation of the firm’s performance. This reduces the cost to individual investors as well as increases the pool of potential investors.
• The SEC had originally announced its intention for a full adoption of IFRS by 2014, according to its 2009 roadmap. While this plan was put on hold due to the financial crisis, this paper provides evidence on the potential benefits of IFRS adoption and invaluable information for the SEC and the FASB in the U.S., and similar regulatory agencies in other countries.