The impact of financial instruments disclosures on the cost of equity capital

• DOI: https://doi.org/10.1108/IJAIM-02-2021-0052
• Published date: 05 August 2021
• Date: 05 August 2021
• Pages: 528-551
• Subject Matter: Accounting & finance,Accounting/accountancy,Accounting methods/systems
• Author: Amal Yamani,Khaled Hussainey,Khaldoon Albitar

The impact of financial

instruments disclosures on the

cost of equity capital

Amal Yamani

King Abdulaziz University, Jeddah, Saudi Arabia

Khaled Hussainey

Department of Accounting, University of Portsmouth,

Portsmouth, UK, and

Khaldoon Albitar

Department of Accounting and Financial Management,

University of Portsmouth, Portsmouth, UK

Abstract

Purpose –This study aims to investigate the impact of financial instrument disclosures under the

InternationalFinancial Reporting Standard (IFRS) 7 on the cost of equity capital (COEC).

Design/methodology/approach –The sample consists of 56 banks listed in the Gulf cooperation

council (GCC) stock marketsover 7 years from 2011 to 2017. A self-constructed index is used to measure the

compliance level in additionto quantitative methods and panel data regression adoptedto test the research

hypotheses.

Findings –The authorsfind that the compliance level with IFRS 7 does not improve from 2011 until 2017 in

the GCC banks. The authorsalso find that compliance with IFRS 7 disclosuresreduces the COEC.

Originality/value –The authorsalso provide new empirical evidence that the levelof mandatory financial

instruments disclosuresunder IFRS 7 reduces the COEC. The findings offer policy implications.It shows that

compliancewith IFRS 7 disclosure requirements leadsto desirable economic consequences.

Keywords Cost of capital, Financial instruments disclosures

Paper type Research paper

Introduction

As International Financial Reporting Standard (IFRS) are designed to be a global common

language for businesses to ensure understandability and comparability of financial

statements across nations (Choi and Meek, 2011;Lin et al.,2019), this language should be

translated in one way only. In other words, IFRSshould not be applied in different ways by

various firms or countries, as any variations in practice will certainly restrict the main

advantages of IFRS adoption. This would also contradict the real meaning of accounting

harmonisation that seeks to remove the differences in accounting outputs across countries

(Amoako and Asante, 2012). Accordingly, the non-compliance issue might raise doubts

regarding the transparency, reliability and quality of financial information between

countries (Hajnal, 2017). Moreover, it has been noticed that most IFRS adopters have their

own versions of compliance with IFRS,which are somewhat different from those outlined by

the International Accounting Standards Board (IASB) (Gina et al., 2016). This, in turn,

causes varying levels of compliance with IFRS and is deemed to be a controversialmatter.

IJAIM

29,4

528

Received27 February 2021

Revised16 May 2021

Accepted4 June 2021

InternationalJournal of

Accounting& Information

Management

Vol.29 No. 4, 2021

pp. 528-551

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-02-2021-0052

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

Even though the strategies set towards IFRS adoption may vary between countries,

countries should not overlook the importance of proper application as recommended by the

IASB. It can also be understood that differencesin national infrastructure undeniably play a

significant role in non-compliance,especially when it comes to developing countries and the

efficiency of the enforcement systems used (Ebrahim, 2014;Pacter, 2016;Pownall and

Wieczynska, 2018).

From another perspective,the financial problems faced by companies in 2008 (the year of

the financial crisis) have aroused the curiosityof all stakeholders, leading many researchers

to investigate the causesbeyond that crisis. It has been found that one of the most important

reasons at that time was the incorrect employment of financial instruments by companies

and the lack of proper control and guidance of such practices. This has promptedthe IASB

to focus on this problem and attemptto improve the use of financial instruments through the

requirements of IFRS 7 (the selected standard for the current study) and IFRS 9 related to

disclosure and measurement requirements, respectively, (Deloitte, 2017a,2017b,2017d,

2017e). Accordingly, the effects of the financial instruments can be found on different

economic aspects as follows: financial information quality, investors and capital markets.

Consequently, one of the aspects that can be discussed in this regard is the cost of equity

capital (COEC), whichis the main focus of this study.

After the global financial crisis, companies faced financial difficulties, especially in the

banking sector and consequently, the Gulf banks were not isolated from this crisis. In

general, the banks’efforts focussed on compensating these losses by raising capital at the

lowest possible cost, which can be expressed as the cost of capital (COC). This encouraged

researchers to studyand analyse this cost and identify the factors thatwould affect it (Ikeda,

2017). In addition, current economic developments have raised political instability in the

Gulf region (Al-Dulaimi and Hamad, 2018), along with the curiosity of researchers to focus

on financial instruments and the role they can play under these circumstances. Gulf

cooperation council (GCC) countries are considered developing countries that produce a

significant amount of oil, which reflects well on the global economy in general (Abdelbaki,

2016). Moreover, increasing trade openness promotes the link between the following two

significant cultures: Eastern and Western(Altaee and Al Jafari, 2018). The expansion of the

mandatory application of the internationalstandards is considered one of the steps to bring

in line the economic and structural developmentsof the financial markets in the Gulf region.

Consequently, thismakes the GCC countries a fertile environment for investigation by many

researchers. From another perspective, the researcher questions the relationship that may

exist between the financial instrumentson the one hand and the COEC in GCC banks on the

other. Despite the importance of both sides, the nature of this relationship has not been

discussed in the literature,to the best of the researcher’s knowledge, especially in the context

of GCC countries. It can be concluded that there is a clear lack of studies in the GCC countries,

whether in terms of measuring the degree of compliance with financial instruments or

discussing the economic impact of such compliance. Therefore, the researcher in this study

answers the following question: what is the expected impact from compliance with IFRS 7 on

the COEC ratio in GCC banks?

The growing interest in financial instruments amongst academics and practitioners,

especially after 2008 and the recent updates to IFRS 7 and IFRS 9, has encouraged researchers

to give more attention to measuring compliance with IFRS 7. Conducting a study like this

highlights the financial instruments’role in financial reporting and how firms deal with these

instruments with regard to disclosure. As financial instruments are one of the most important

tools that large companies in general and the banking sector in particular deal with, this

makes it necessary to monitor the application and reveal how firms deal with these financial

Financial

instruments

disclosures

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