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Disclosure and the Cost of Capital: Evidence from the Market's Reaction to Firm Voluntary Adoption of IAS
Author(s) -
Karamanou Irene,
Nishiotis George P.
Publication year - 2009
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2009.02154.x
Subject(s) - cost of capital , voluntary disclosure , accounting , shareholder , corporate governance , business , sample (material) , capital market , capital (architecture) , enterprise value , value (mathematics) , international financial reporting standards , monetary economics , turnover , economics , finance , microeconomics , profit (economics) , chemistry , archaeology , chromatography , management , machine learning , computer science , history
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.