DAF02 – IFRS Accounting Standards and the cost of capital

Supervisors: Dr Carien van Mourik, Dr Siqi Liu and Dr Lemonia Marina Rempoutsika (Department of Accounting and Finance, The Open University Business School, Faculty of Business and Law).

Background:

The International Financial Reporting Standards (IFRS) Foundation is an ‘independent, not-for-profit organisation founded on the belief that better information from companies leads to better investment decisions’ (IFRS - Who we are). The IFRS Foundation’s mission is to set high-quality IFRS Standards that bring transparency, accountability and efficiency to capital markets around the world. Under the umbrella of the IFRS Foundation reside the International Accounting Standards Board (IASB) and the International Sustainability Standards Board (ISSB). The IASB, established in 2001, develops IFRS Accounting Standards and the ISSB, established in 2021, develops IFRS Sustainability Disclosure Standards. IFRS Standards (i.e., IFRS Accounting Standards and IFRS Sustainability Disclosure Standards) are intended to improve the communication between companies and investors.

In 2002, the European Union (EU) decided that, from 2005, consolidated financial statements be prepared in accordance with IFRS Accounting Standards as endorsed by the EU. Australia, New Zealand, Hong Kong, and South Africa soon followed suit. At the start of 2025, IFRS Accounting Standards are used or accepted in some 140 (out of 168) jurisdictions around the world (IFRS - The use of IFRS® Accounting Standards around the world).

At the time, the belief was that high quality accounting standards would lower the cost of capital (Levitt 1998). ‘A priori, there were many conjectured benefits from IFRS adoption, including more efficient cross-border transacting, enhanced informativeness of financial reports (increased transparency), greater inter-company comparability of financial data, better asset prices (efficiency), lower cost of capital, and balance sheets that facilitate more efficient contracting between companies and lenders’ (Ball 2016, p. 546).

Project Aims:

Against the background outlined above, the main aim of this project is to understand: In what ways, and to what extent, has the IFRS Foundation made progress towards achieving its mission over the past 25 years?

More specifically: Are the adoption and continued use of IFRS Accounting Standards associated with increased comparability, liquidity, and efficiency in global capital markets, a lower cost of capital for companies, and higher returns for investors?

The literature on the association between the quality of information disclosure (voluntary and mandatory) and the cost of capital is vast, and the findings are somewhat mixed. While ‘prior research provides some evidence that voluntary IFRS adoption reduces the cost of equity capital (e.g., Leuz and Verrecchia 2000; Barth et al. 2008), these findings are not necessarily generalizable to mandatory IFRS adopters (Ball et al. 2003; Sunder 2007)’ (Li 2010, p. 607). Opare et al (2021) provide a meta-analysis of 56 empirical studies covering sample periods ranging from one to 16 years (average 4 years) sometime during 1989-2014. They find that: ‘Overall, adoption of IFRS significantly improves comparability, increases market liquidity, and reduces the cost of equity capital, but has no significant effect on the cost of debt. Mandatory adoption produces greater impact than voluntary adoption’ (Opare et al 2021, p. 547). Their findings ‘indicate that the mixed results in empirical studies are principally due to the mode of adoption, differences in choice of measures, control variables, estimation methods, and measures indicating the strength of the results’ (Opare et al 2021, p. 548).

Bertomeu and Cheynel (2016) provide an overview of the theoretical literature on disclosure and the cost of capital. They compare asset pricing models and their assumptions about the relation between disclosure and the cost of capital. In addition, Bertomeu and Cheynel (2016) identify areas of agreement as well as unresolved and present open challenges for theorists and empiricists. Relatedly, Cai (2023) identifies19 theoretical studies into the relation between disclosure and cost of capital published between 2000 and 2020. She categorises them into four categories in a matrix along the assumptions: symmetric versus asymmetric information and pure exchange economy versus production-based economy. She creates a citation map of the 30 most cited empirical and theoretical studies, and then reviews the assumptions of the theoretical models how the theoretical models have been applied in empirical studies. Like Chen and Schipper (2016) and Bertomeu et al (2016), Cai (2023) argues for stronger theoretical foundations in accounting research.

Expectation:

The candidate is expected to produce a PhD research proposal that seeks to fulfil the main aim of the project. The candidate must propose a quantitative empirical study and indicate:

• how the concerns about the disconnect between theory and empirics expressed by Cai (2023), Chen and Schipper (2016), and Bertomeu et al (2016) will be addressed in the research design and the research plan,
• how the causes of the mixed results in empirical studies into the relation between disclosure and the cost of capital identified by Opare et al (2021) will be addressed by the research design.

The proposal can focus on:

• companies in the financial sector, manufacturing, services, or other sectors,
• companies in a single jurisdiction, the EU, or compare EU countries with other countries, or several jurisdictions,
• the period from 2005 to 2025 (mandatory EU) or other periods, depending on the jurisdiction,
• different periods depending on the (changes in or issuing of new) specific IFRS Accounting Standards,
• or any combination of the above.

Furthermore, the proposal must show awareness of the relevant historical context of the sector, period, and/or standards chosen.

Finally, the proposal must show a clear understanding of the independent nature of PhD research and the need to use one’s time efficiently and effectively in order to complete within three years.

References:

Ball, R. (2016). IFRS–10 years later. Accounting and Business Research, 46(5), pp. 545-571.

Ball, R., Robin, A., and Wu, J.S. (2003). Incentives versus standards: properties of accounting income in four East Asian countries. Journal of Accounting and Economics, 36(1-3), pp. 235-270.

Barth, M.E., Landsman, W., and M. Lang. (2008). International Accounting Standards and accounting quality. Journal of Accounting Research, 46 (3), pp. 467–498.

Bertomeu, J., and Cheynel, E. (2016). Disclosure and the cost of capital: A survey of the theoretical literature. Abacus, 52(2), pp. 221-258.

Bertomeu, J., Beyer, A., and Taylor, D. J. (2016). From casual to causal inference in accounting research: The need for theoretical foundations. Foundations and Trends® in Accounting, 10(2-4), pp. 262-313.

Cai, C.W. (2023). Filling the gap and moving forward: a review of analytical and empirical studies of disclosure and cost of capital. Journal of Accounting Literature, 45(1), pp. 130-153.

Chen, Q., and Schipper, K. (2016). Comments and observations regarding the relation between theory and empirical research in contemporary accounting research. Foundations and Trends® in Accounting, 10(2-4), pp. 314-360.

Leuz, C., and Verrecchia, R.E. (2000). The economic consequences of increased disclosure. Journal of Accounting Research, 38 (Supplement), pp. 91-124.

Levitt, A. (1998). The importance of high-quality accounting standards. Accounting Horizons, 12(1), pp. 79-82.

Li, S. (2010). Does mandatory adoption of International Financial Reporting Standards in the European Union reduce the cost of equity capital?. The Accounting Review, 85(2), pp. 607-636.

Opare, S., Houqe, M.N., and Van Zijl, T. (2021). Meta‐analysis of the impact of adoption of IFRS on financial reporting comparability, market liquidity, and cost of capital. Abacus, 57(3), pp. 502-556.

Sunder, S. (2007). Uniform financial reporting standards: Reconsidering the top-down push. The CPA Journal, 77 (March): pp. 6–9.