The impact of mandatory IFRS adoption on capital markets: evidence from 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 financial statements were taken as primary financial statements. Before the adoption of IFRS, consolidated financial statements were taken as supplementary financial statements. Design/methodology/approach - The authors measure the cost of equity using the average estimates from the implied cost of capital models proposed byClaus and Thomas (2001),Gebhardtet al. (2001),Easton (2004) andOhlson 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-adoption period and 0 otherwise. Findings - Using a sample of listed Korean companies during the period from 2000 to 2013, the authors find evidence of a significant reduction in the cost of equity capital in Korean listed companies after mandatory adoption of 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 O’Hara 2004;Covriget al. 2007;Lambertet al. 2007;Daskeet al. 2008). According to the results of this study, increased financial disclosure and enhanced information comparability, along with changes in legal and institutional enforcement, seem to have had a joint effect on the cost of equity capital, leading to a large decrease in expected equity returns.