Mandatory IFRS adoption and the cost of equity capital: Evidence from Spanish firms

Purpose: The main objective of this paper analyses the effects of mandatory International Financial Reporting Standards (IFRS) adoption by Spanish firms in 2005 on the cost of equity capital. Design/methodology/approach: Using a sample of listed Spanish companies during the 1999 to 2009 period and a country-level focused analysis. To achieve our objective we relied on OLS regression analysis and estimate the dependent variable – the cost of equity – by using the proxy suggested in Easton (2004). Findings: We find evidence that, unlike previous studies, Spanish listed companies show a significant reduction in their cost of equity capital after the mandatory adoption of IFRS in 2005, after controlling by a set of firm-risk and market variables. According to our results, increased financial disclosure and enhanced information comparability, along with changes in legal and institutional enforcement, seem to have a joint effect on the cost of capital, leading to a large decrease in expected equity returns. Research limitations/implications: The main limitation of the study is that the sample represents just one country.-562-Intangible Capital