Mandating IFRS: its impact on the cost of equity capital in Europe
In 2005, the adoption of International Financial Reporting Standards (IFRS) was made mandatory across the European Economic Area.
The cost of equity capital is important to corporate finance and investment decisions. Many academics and practitioners held that the adoption of IFRS would lead to a reduction in the cost of equity capital, whereas others argued it may not result in the effects promised.
The evidence suggests that the impact of the mandatory adoption of IFRS in Europe is most positive where corporate disclosure quality is high and equity finance most widespread. This is, in many ways, a surprising result.