The Effects of Accounting Standardization in the European Union on the Capital Market: First Evidence from the Bank Industry

In this research, the effects of accounting standardization in Europe on the capital market has been investigated by focusing on the bank industry. In particular, since the main purpose of the European Regulation 1606/2002 is that of fostering an efficient and cost-effective functioning of the capital market, this paper directly relates accounting standardization to the cost of equity. The adoption of the same accounting standard set within the Community was expected to improve comparability and, in such a way, to reduce firms' differences in the cost of equity. Contrary to expectations, empirical evidence shows that the adoption of the IAS has led to an increase, instead of a reduction, in the cost of equity. The explanation that can be advanced for such a result is that while, on the one hand, accounting standardization has eliminated measurement errors in assessing firms' risk, reducing differences in their cost of equity, on the other hand, the IAS/IFRS adoption has improved firms' level of disclosure, allowing investors to better differentiate among firms' risk, hence increasing cost of capital variability.