The impact of mandatory IFRS adoption on capital markets: evidence from Korea

Date05 March 2018
Published date05 March 2018
AuthorSaerona Kim,Haeyoung Ryu
Subject MatterAccounting & Finance,Accounting/accountancy,Accounting methods/systems
The impact of mandatory IFRS
adoption on capital markets:
evidence from Korea
Saerona Kim
Soongeui Womens College, South Korea, and
Haeyoung Ryu
Hansei University, Gunpo, South Korea
Purpose The purpose of this paper is to examine the effects of adoption of the mandatory
International Financial Reporting Standards (IFRS) on the cost of equity capital in a unique Korean
setting. In Korea, individual nancial statements were taken as primary nancial statements. Before the
adoption of IFRS, consolidated nancial statements were taken as supplementary nancial statements.
Design/methodology/approach The authors measure the costof equity using the average estimates
from the implied cost of capital models proposedby Claus and Thomas (2001), Gebhardt et al. (2001), Easton
(2004) and Ohlson and Juettner-Nauroth(2005), using it as the primary dependent variable. Mandatory IFRS
adoption, the independent variablein this study, is assigned a value of 1 for the post-adoption period and 0
Findings Using a sampleof listed Korean companies during the periodfrom 2000 to 2013, the authors nd
evidence of a signicant reduction in the costof equity capital in Korean listed companies after mandatory
adoptionof the IFRS in 2011, after controlling for a set of market variables.
Originality/value This study is one of a growing body of literature on the relations between
mandatory IFRS adoption and the cost of equity capital (Easley and OHara 2004;Covrig et al. 2007;
Lambert et al. 2007;Daske et al. 2008). According to the results of this study, increased nancial
disclosure and enhanced information comparability, along with changes in legal and institutional
enforcement, seem to have had a jointeffectonthecostofequitycapital, leading to a large decrease in
expected equity returns.
Keywords IFRS, International nancial reporting standards, Cost of equity capital,
Mandatory IFRS adoption
Paper type Research paper
1. Introduction
The International Financial Reporting Standards (IFRS) were adopted as the standard
nancial language of the world during the early 2000s. Specically in Korea, many
companies frequently abused the K-GAAP, the former standards for preparing nancial
statements for individual rms, committing accounting fraud by creating special purpose
entities (SPE). The credibilityof Korean companies in the global context diminished because
of this fraud, which became the grounds for introducing the IFRS. In these new accounting
standards, the parent company and subsidiary companies are treated as a single entity. As
national barriers gradually disappeared and capital ows increased rapidly with
deregulation of the international capital market, countries around the world recognized the
importance of using and improving this uniformaccounting standard. The global nancial
crisis in the latter half of 2008 greatly elevated the status of the IFRS because high-quality
Received4 May 2016
Revised2 September 2016
2 December2016
31January 2017
Accepted3 February 2017
InternationalJournal of
Accounting& Information
Vol.26 No. 1, 2018
pp. 38-58
© Emerald Publishing Limited
DOI 10.1108/IJAIM-05-2016-0049
The current issue and full text archive of this journal is available on Emerald Insight at:
accounting standards are criticalto the development of a superior global nancial reporting
In Korea, the IFRS was used to settle the Korea discountproblem caused by the lack of
transparency in nancial reporting.In addition, Korean rms began to enjoy the benets of
the IFRS and its principle-oriented accounting standards, as their real status was properly
reected. As for investment analysis by foreign investors in Korean companies, it was
predicted to become easierfor companies to raise foreigncapital. Because the IFRS was only
formally implemented in 2011, there is a need to verify the effects of IFRS adoption on
Korean companies. This study is an empirical investigation of these effects on capital
There still is great controversy over the effects of mandatory IFRS adoption on the cost
of equity. First, proponents of theIFRS argue that it generally requires more comprehensive
disclosure than most local accounting standards because companies are obliged to utilize
fair value accounting, and credibility, liquidity and market risk are also important.
Theoretical studies arguethat this increased disclosure reduces the cost of equity capital by
decreasing information asymmetry (Diamond and Verrecchia, 1991;Easley and OHara,
2004). From a different perspective, mandatory IFRS adoption can enhance comparability
between nancial statements, especially for foreign investors, who may have difculty
understanding and comparing nancial statements from many countries that have their
own accounting systems. Introduction of the IFRS can, therefore, facilitate investment by
foreign investors (Covrig et al., 2007). In addition, greater comparability may decrease the
cost of equity capital (Dye, 1990). As a result, adoption of the IFRS can reduce the cost of
equity by increasing additionaldisclosure and enhancing information comparability among
countries (Li, 2010). On the other hand, others argue that the quality of nancial reporting
cannot simply be increased by introduction of a new accounting standard; rather, nancial
reporting is interlinked with various factors, such as incentives of the persons utilizing the
accounting standards and preparing nancial reports, the degree of regulation by
supervising institutions and other economic circumstances. These factors can have
unintended effects on the capital market (Holthausen, 2003;Ball, 2006). Accordingly, the
relationship betweenmandatory IFRS adoption and the cost of equity capital is an issue that
should be empiricallyveried.
The purpose of this study is to determine whether mandatory IFRS adoption in 2011
reduced the cost of equity capital. Also, in a recent study, it was argued that the effectsof a
new accounting standard on economic outcomes differ according to the incentives for
nancial reporting[1].Therefore, the relationship between mandatory IFRS adoptionand the
cost of equity capital is examined in this study with consideration of those incentives. The
effects of mandatory IFRS adoption on rm value are alsoconrmed. Consistent with prior
research, we measure the cost of equity using the averageestimates from the implied cost of
capital models proposed by Claus and Thomas (2001),Gebhardt et al. (2001),Easton (2004)
and Ohlson and Juettner-Nauroth (2005), using it as the primary dependent variable.
Mandatory IFRS adoption, the independent variable in this study, is assigned a value of 1
for the post-adoptionperiod and 0 otherwise.
To analyze the effects of mandatory IFRS adoption on the cost of equity capital, we
selected a sample including 1,658 rm-years from the Korea Stock Exchange (KSE) for the
period between 2000 and 2013. A signicant negative relationship was shown between
mandatory IFRS adoption and the costof equity capital after 2011. This result veried that
mandatory IFRS adoption decreases thecost of equity capital by increasing disclosure and
information comparability. However, during the sampling period ending in 2011, no
Impact of
IFRS adoption

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT