Paper long abstract:

This study examines the economic consequences of mandatory adoption of International Financial Reporting Standards (IFRS) from firm level perspective, and across country classification (developing versus developed economy). Using a global sample of firms from 40 / 45 countries spanning over two decades from 1993-2016, and applying difference-in- differences design, we analyze the induced changes in the cost of equity / debt capital following IFRS adoption. We find that mandatory adopters in developing countries are not more likely to experience significant decreases in the cost of equity in the post-adoption period than firms in developed countries. Even more important, in neither country group mandatory adopters show an advantage over non-adopters from our control group, meaning that IFRS adoption does not have a positive effect on cost of equity capital. However, for cost of debt we identify an advantage of mandatory adopters over non-adopters in developing as well as in developed countries. At the same time, firms in developed countries show a larger decrease in the cost of debt than firms in developing countries. Furthermore, as an additional analysis we examine the impact of IFRS adoption on cost of equity under consideration of a country's institutional settings and its shareholder protection regime. In line with prior literature we find that IFRS adoption seems more beneficial when a country exhibits high governance quality, which accounts for both country groups. However, regarding shareholder protection our findings are twofold. In developed countries IFRS adoption seems most beneficial to firms which are located in strong shareholder protection regimes, whereas in developing countries the opposite is the case. Overall, our findings suggest that mandatory IFRS adoption does not necessarily come along with economic benefits and should be considered when promoting the worldwide introduction of IFRS, especially in developing countries.

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