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Disclosure and the Cost of Capital: Evidence from the Market's Reaction to Firm Voluntary Adoption of IAS

Authors

  • Irene Karamanou,

    1. The authors are both from the University of Cyprus. They would like to thank Martin Walker (editor), and an anonymous referee for their insightful comments and suggestions. They would also like to thank Andreas Charitou, Grace Pownall, Lenos Trigeorgis, Nikos Vafeas, Joe Weber, seminar participants at the 2005 joint JAR/LBS conference on International Financial Reporting Standards, and the 2005 American Accounting Association Meeting, for helpful comments and suggestions. They thank Spyros Charitou and the American Embassy in Nicosia for providing access to Lexis-Nexis and Factiva and Michalis Petrides and Julie Ioannou for excellent research assistance. The paper has previously circulated under the title ‘The Valuation Effects of Firm Voluntary Adoption of International Accounting Standards.’ All remaining errors are the authors' own.
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  • George P. Nishiotis

    1. The authors are both from the University of Cyprus. They would like to thank Martin Walker (editor), and an anonymous referee for their insightful comments and suggestions. They would also like to thank Andreas Charitou, Grace Pownall, Lenos Trigeorgis, Nikos Vafeas, Joe Weber, seminar participants at the 2005 joint JAR/LBS conference on International Financial Reporting Standards, and the 2005 American Accounting Association Meeting, for helpful comments and suggestions. They thank Spyros Charitou and the American Embassy in Nicosia for providing access to Lexis-Nexis and Factiva and Michalis Petrides and Julie Ioannou for excellent research assistance. The paper has previously circulated under the title ‘The Valuation Effects of Firm Voluntary Adoption of International Accounting Standards.’ All remaining errors are the authors' own.
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* Address for correspondence: Irene Karamanou, University of Cyprus, 75 Kallipoleos Ave., 1678 Nicosia, Cyprus.
e-mail: Irene.Karamanou@ucy.ac.cy

Abstract

Abstract:  Using a unique international setting where the effects of disclosure on firm value can be measured in a constant regulatory environment and in isolation of other confounding factors, this paper shows that firms can increase their value through their choice of accounting standards. Specifically, we document strong positive abnormal returns at the announcement of voluntary adoption of International Accounting Standards (IAS / IFRS) by a sample of international firms and an economically significant reduction in long-run returns, consistent with a reduction in the cost of capital. Consistent with these results we also document evidence of an upgrade in analyst recommendations after the IAS / IFRS adoption announcement and a reduction in the implied cost of capital. Finally, we find strong evidence that the documented abnormal returns are consistent with signaling and bonding benefits stemming from the reduction in asymmetric information. Our results highlight the importance of increased disclosure on minority shareholder protection and on corporate governance in general.

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