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Economic Benefits of Adopting IFRS or US-GAAP – Have the Expected Cost of Equity Capital Really Decreased?


  • Holger Daske

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      The author is from the Johann Wolfgang Goethe-Universität Frankfurt am Main. This paper is based on his dissertation and forms part of the HARMONIA program on research into accounting harmonisation and standardisation in the European Union. He gratefully acknowledges the financial contribution of the European Commission through the Human Potential Program, Contract HPRN-CT-2000-00062 and of Arthur Andersen and Ernst & Young. He is grateful to Thomson Financial IBES for providing analyst earnings forecast data. He is particularly indebted to Günther Gebhardt and Christian Leuz for their support. He thanks Martin Walker (an editor), Peter Easton (the discussant), Jörg Baetge, Wolfgang Ballwieser, Martin Glaum, Luzi Hail, Martien Lubberink, Stuart McLeay, John O’Hanlon, Steve Penman, Peter Pope (an editor), Bill Rees, Steve Young and workshop participants at the EIASM Workshop 2003 (Frankfurt), the VHB Pfingsttagung 2004 (Graz), the AAA/IAS Midyear-Conference 2005 (San Antonio), the EAA Annual Congress 2005 (Göteborg) and the JBFA Capital Markets Conference 2005 (Windermere) for helpful comments. The paper has received the AAA/IAS Doctoral Student Paper Award 2005.

†Holger Daske, Professur für Betriebswirtschaftslehre, insb. Wirtschaftsprüfung (Accounting and Auditing), Johann Wolfgang Goethe-Universität Frankfurt am Main, Mertonstr. 17–25, D-60325 Frankfurt/M., Germany.


Abstract:  The question of whether the adoption of International Financial Reporting Standards (IFRS) results in measurable economic benefits is of special interest, particularly in light of the European Union's adoption of IFRS for listed companies. In this paper, I investigate the common conjecture that internationally recognised financial reporting standards (IAS/IFRS or US-GAAP) reduce the cost of capital for adopting firms. Building on Leuz and Verrecchia (2000), I use a set of German firms that have adopted such standards and investigate the potential economic benefits of this reporting strategy by analysing their cost of equity capital through the use and customisation of available implied estimation methods. Evidence from the 1993–2002 period fails to document lower expected cost of equity capital for firms applying IAS/IFRS or US-GAAP. During the transition period I analyse, the expected cost of equity capital in fact appear to have rather increased under non-local accounting standards.