The Influence of IFRS Adoption on Banks’ Cost of Equity: Evidence from European Banks

Abstract

This study examines how mandatory adoption of International Financial Reporting Standards (IFRS) in European countries affects banks’ cost of equity. Supporters of IFRS argue that its adoption improves the quality of accounting information, which in turn decreases the cost of equity. However, banking regulators could intervene in the implementation of new accounting standards to protect the stability of the banking system, which would deteriorate banks’ information environment and thereby increase the cost of equity. Using a regression analysis of European listed bank data, I find that banks’ cost of equity increases after the adoption of IFRS in countries with strong bank supervisory offices. I also find that strong legal enforcement and additional disclosure requirements jointly reduce banks’ cost of equity, but pre-IFRS inconsistencies between local accounting standards and regulatory standards jointly increase banks’ cost of equity. This study contributes to the literature on market discipline in banking and has policy implications: The findings suggest that, when implementing new accounting standards, potential conflicts between financial reporting and banking regulations should be considered.

Determinants of Basel III Risk Disclosures: The Case of Gulf Cooperation Council Public Banks

“…supposed to enhance accounting quality. This statement has been empirically documented by several recent studies(De Moura et al, 2020;Yim, 2020;Adeolu Abata & Ayinde Amoo…”

Análisis de estudios empíricos sobre el efecto de las NIIF en el costo de capital propio

“…Dentro de las variables dependientes se encuentra la rentabilidad por su relación directa con el costo de capital al tener implícitos los resultados de los hechos económicos en la organización. Para este indicador se empleó una desviación estándar de las ganancias por acción (Turki et al, 2017) (de Moura et al, 2020; la variabilidad de las ganancias (Kim et al, 2014) (da Silva y Nardi, 2017) (Daske et al, 2008), los retornos de la inversión (Saha y Bose) (Yim, 2020) y los retornos mensuales de endeudamiento (Li, 2010).…”

The impact of financial instruments disclosures on the cost of equity capital

“…This may be due to several reasons, including that countries with a strong regulatory nature may not notice a significant difference, especially with regard to lowering the COC (Daske, 2006) and the way that the standards (IFRS) are applied, along with the possible need for more time to obtain some of the expected benefits such as reduced COC (Gatsios et al, 2016;Daske et al, 2013). Another reason is that countries must take into account the compatibility between the regulations in place; this means that there should be no conflict between the accounting standards adopted and the regulations set (Yim, 2020).…”

“…From another perspective, most of the results demonstrate that the level of disclosure reduces the COC (Diamond and Verrecchia, 1991;Chen et al, 2003;Xiao, 2006;Espinosa and Trombetta, 2007;Lopes and de Alencar, 2010;Li and Yang, 2013;Fahdiansyah, 2016;Yim, 2020). The correlation between the degree of disclosure and the COEC may depend on a range of factors, such as effective corporate governance in countries with a strong legal protection system (Chen et al, 2003).…”

“…et al (2013, p. 393) state that "If IFRS is higher-quality standards and provide better information, then IFRS adoption has the potential to generate the above benefits". It can be Financial instruments disclosures said that having high-quality accounting standards, such as IFRS, would reduce the COC for companies (Huang and Yan, 2020;Yim, 2020). In fact, reviewing IFRS literature and its application is a theme that still requires more investigation and development (Houqe, 2018).…”