The effects of the IAS/IFRS Adoption in the European Union on the Financial Industry

The effect of disclosure level on the cost of equity is a matter of considerable interest and importance to financial reporting standard setters. In this research, early evidence on the effects of the IAS/IFRS adoption in Europe on the cost of equity capital relative to the bank industry have been provided. Previous research has shown that the adoption of the IAS/IFRS reduces information asymmetry between investors and firms. Economic theory claims that a commitment to increased level of disclosure reduces the cost of capital component that arises from information asymmetries. This study shows empirically that the increase in the level of disclosure provided by the adoption of the IAS/IFRS in the European Union by Regulation 1606/2002 has led effectively to a lower cost of capital. Overall, our findings provide evidence that the Regulator’s purpose of fostering a cost-efficient functioning of the capital market for firms could be considered as accomplished.