Cost of equity effects from mandatory IFRS adoption : the importance of reporting incentives
Leung, Raymond Wai-To
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This thesis examines how the cost of equity associates with reporting incentives in mandatory IFRS adoption for  European Union (EU) countries. First, with more data available for the post-adoption period, prior studies are extended by measuring if the mandatory adoption of IFRS in 2005 reduces the cost of equity. Second, using a comprehensive set of reporting incentives by both firm-specific core business factors (CBF) and internal corporate governance (ICG), and country-specific institutional environment factors (IEF), this study further investigates if both individual and interactive effects of reporting incentives in mandatory IFRS adoption are associated with cost of equity effects. Using a sample of 7,294 firm-year observations in the EU between 2000 and 2009, the findings show that, on average, mandatory adopters have a significantly lower cost of equity of 1.2% (significant at the 1% level using a two-tailed test). Also, the results provide evidence that mandatory IFRS adoption interacts with both firm-specific CBF and ICG and associates with significant differential effects in the cost of equity. In addition, when sampling firms are partitioned into different comprehensive legal, economic, social and cultural characteristics, mandatory adopting firms interact with CBF and/or ICG based on their particular IEF settings. Overall, these findings support the pro-incentive view that significant capital market benefits to shareholders cannot be derived by only adopting a single set of high quality accounting standards, unless firms have a high level of reporting incentives.