How does ifrs reduce cost of capital

Disclosure quality, cost of capital, and investor welfare. The Accounting Review, 85 1 , For the Brazilian case, the results may not follow the ones found for the European case for different reasons: 1. The papers in this research line are still recent in Brazil. Nardi and Silva Nardi, P.

Due to what was said and, aiming to contribute to elucidate the effects of the IFRS adoption on equity cost in Brazil, the research problem of this paper is presented: Does the IFRS adoption contributes for the reduction of equity cost of open capital companies in Brazil? Thus, when answering the research problem presented, this work has as main purpose to assess whether the IFRS adoption has reduced the equity cost of open capital companies in Brazil.

The data were collected for the period from to and divided in three parts: 1. Capital assets price: a theory of market equilibrium under conditions of risk. Journal of Finance, 19 3 , For analyzing the impact of the IFRS adoption on equity cost of companies, the methodology of panel data and differences in differences were used.

In order to control the impact of other factors on the cost of equity cost, the dummy variables of profitability, indebtedness, voluntary disclosure, basic interest rate of Brazil, national capital return and capital market volatility index were used. The results of this paper indicate that contrary to the findings in the studies for European countries, the IFRS adoption has still not contributed significantly for the reduction of equity cost of open capital companies in Brazil.

Nonetheless, the paper presents the importance of the use of economic variables in the models of IFRS impact assessment in the equity cost of Brazilian companies since the financial crisis affected significantly the profitability of fixed and variable income market in Brazil and in the world. Besides this introductory part, this paper presents a literature review on the IFRS adoption, accounting information quality, and the impact of the IFRS adoption on the equity cost of companies. Following, there is the presentation of the research methodology and the results found and, finally, the final considerations and benchmarks used in the research are presented.

The IFRS is a set of international accounting standards aiming the improvement of information quality and the standardization of accounting statements in the world Deloitte, Deloitte. The IFRS adoption presents specific traits in the different countries which have already concluded the convergence to international standards, as the countries still in the period of IFRS adoption.

In Europe, the convergence process to international standards was carried out earlier. In , there was the announcement of the IFRS adoption which forced the European companies with shares traded in the stock market to disclose their accounting information in the new international standards from and on Deloitte, Deloitte.

Just like Europe, Australia carried out a rapid action of international accounting standards adoption. In the beginning of , Australian companies began disclosing the information according to the IFRS. IFRS adoption and analysts' earnings forecasts: Australian evidence. Accounting and Finance, 52 2 , Implementation of IFRS in a regulated market. Journal Accounting Public Policy, 27 6 , Thus, the authors believe that Chinese companies and the local government are still not prepared for the IFRS adoption.

Also, the transition process continues slowly in the United States. The Securities Exchange Commission SEC announced the proposal of convergence to the international accounting standards in ; however, the adoption should be carried out from and on Deloitte, Deloitte. After this period of initial preparation, the IFRS adoption was carried out in two phases in Brazil: 1. After the adoption of the international accounting standards, several studies were carried out to assess the impact of such adoption on the capital market.

The authors found evidences of improvement in the informational content after the IFRS adoption. According to Lee et al. Introduction of International Accounting Standards, disclosure quality accuracy of analysts' earnings forecasts. European Accounting Review, 22 1 , The results indicated a significant increase in analysts' accuracy after the international accounting adoption, suggesting that greater information disclosure affects the quality of forecast performed.

The study of Daske et al. The results found pointed out a significant increase in market liquidity of companies in the sample, in the share turnover and in the market value of companies analyzed, since the reduction of equity cost is related to institutional aspects.

On the other hand, Li Li, S. The study found evidences of base-point reduction in the capital cost of companies from to Nonetheless, the studies indicated that the reduction in capital cost is related to the enforcement for applying the standards.

Nevertheless, it is important to point out that the IFRS adoption may have a contrary effect on accounting information quality as presented in the study of Barth et al.

As presented by Gao Gao, P. Law and Finance. Journal of Political Economy, 6 , It is important to point out that, according to Soderstrom and Sun Soderstrom, N. European Accounting Review, 16 4 , Among these characteristics, the development of capital market and the enforcement for the execution of such standards are highlighted.

However, the study of Markov and Tamayo Markov, S. Predictability in financial analyst forecast errors: learning or irrationality? Journal of Accounting Research, 44 4 , Therefore, the effects of the IFRS adoption in Brazil may be different from those found in studies carried out for the European case, due to institutional and economic differences between Europe and Brazil, as well as the fact that the international accounting standards have been recently adopted in Brazil and the strong impact of the financial crisis.

The results indicated a small 7-base point reduction for capital cost in the period. This paper aims to expand the assessment of the impact of partial and mandatory IFRS adoption on equity cost in Brazil since the results found indicate a low relation between the IFRS adoption and equity cost of Brazilian open capital companies.

Therefore, this paper proposes to assess the equity cost by the CAPM adapted to the Brazilian reality, since this model works with the ex post variables and thus, does not depend on market analysts' future expectations for its assessment.

Finally, this paper aims to contribute to the assessment of the impact of economic variables on the equity of open capital companies in Brazil in the period of IFRS adoption because it was in this period that great volatility of fixed income and variable income markets took place in Brazil and in the world due to the effects of the financial crisis.

After presenting the theoretical frame and based on evidences presented, the following research hypothesis was elaborated and it will be investigated through the methodology proposed in Section 3. H0: The adoption of international accounting standards decreased the equity cost of Brazilian open capital companies.

The decision for excluding the data of financial companies was because of the difference in accounting standards and the specific regulation for this sector. The definition of the analysis period is justified when comprehending the period prior to the IFRS adoption, partial or mandatory adoption. Nonetheless, the choice for the beginning of the series in aimed to reduce the impact of the effects of the Brazilian presidential election in the variables used in the paper.

According to Assaf Neto et al. Thus, the same authors suggest a model adapted to the Brazilian reality. In equation 1 the model used in this research for the calculation of equity cost of Brazilian open capital companies is presented. This paper uses the methodology presented by Assaf Neto et al. The choice for the use of CAPM is due to the fact it is widely used in calculating equity cost in processes of opening and closing of capital of Brazilian open capital companies, bringing the methodology used close to the Brazilian reality.

It is important to highlight that the use of CAPM is justified despite all the limitations, since, as presented by Assaf Neto et al. This statement is also endorsed by the studies of Graham and Harvey Graham, J. How do CFOs make capital budgeting and capital structure decisions. Journal of Applied Corporate Finance, 15 1 , Even so, other methodologies of equity cost calculation use the market analysts' forecast Li, Li, S. Thus, its mediation is impacted by the predictive ability of analysts.

In Brazil, according to Martinez Martinez, A. Therefore, the calculation of equity cost through this methodology could suffer an impact from the bias of market analysts' forecast. The risk-free rate Rf was calculated by the annual average of returns generated by the American government bonds, the Treasury Bills T-bill of year maturity. The market return was calculated by the return average of the last 20 years of the Dow Jones share index. The American inflation was calculated by the mean of the CPI forecasted for the next 12 months.

Morgan's methodology. The sample was divided in three periods: 1. In the paper, the panel data methodology with fixed and random effects was used. Panel data refers to the observation of different units in different moments of time Wooldridge, Wooldridge, J. The general model for this methodology is represented by Equation 2.

In Equation 2 , the subscript i represents the different individuals and the subscript t denoted the time period analyzed. According to Wooldridge Wooldridge, J. In this paper, the differences in differences DD methodology was used due to the fact that, through the panel data analysis and despite the controls used, it is possible that omitted variables influence the relation between the interest variable and the dependent variable.

For this analysis, the company sample was divided into two groups: the control group, formed by companies that adopted the IFRS before the mandatory adoption of the international accounting standards in Brazil, due to the fact they disclosed information in other accounting standards, and the companies that adopted the IFRS in a mandatory way, after the adoption of international accounting standards in Brazil OBR.

Thus, the model is presented in Equation 3. This methodology was used in Nardi and Silva's Nardi, P. However, this paper includes control variables for the economic scenario and risk, besides using the CAPM for the calculation of equity cost and measuring the effect of the IFRS adoption in Brazil.

Thus, the DD model for this study in presented in Equation 4. Following the studies of Daske et al. The variables used are presented next:. Morgan methodology in the t period;. Nevertheless, the dummy variables of the sector were included in the model to control the effect of activity difference on equity cost.

The corporate governance variables were not included in the model due to their high multicollinearity with the OBR variable since companies that disclosed information in other accounting standards have a greater level of corporate governance.

After the presentation of the theoretical frame of the research, the results of the paper will be presented in the part that follows. In this part, the descriptive statistics of variables used in the models and the results found for the assessment model of the impact of the international accounting standards adoption on the equity cost of Brazilian open capital companies are presented.

Data of companies that did not present values for different variables along the period analyzed were excluded. Companies from the financial sector were excluded due to the difference of the standards of information disclosed by those companies, as well as the difference in regulation of these companies in the Brazilian market.

Table 1 shows the total sample and the subsamples of this paper. Aiming to assess the capital cost more completely, the descriptive statistics of variables used for the Ke calculation by CAPM is presented.

In Table 2 , it is seen that the equity cost of Brazilian open capital companies increased in the period of partial IFRS adoption when compared to the period prior to the adoption, going from Nevertheless, in the period of mandatory adoption, the equity cost falls when compared to the period of partial adoption, but it continues above what was evinced in the period prior to the IFRS adoption in Brazil, with a value of Through the results, an increase of beta variable which measures the risk of investing in a company was seen.

It is important to observe that the risk free fell significantly during the period analyzed, as well as the market risk. Both results are due to the effect of the international financial crisis because, as a strategy of reduction of the crisis effect, the U. Central Bank opted to reduce the interest rate in the period.

Nevertheless, the reduction of market return is due to the effect of the crisis in the capital market. Finally, in Table 3 , there is the presentation of data showing that the control variables have also gone through changes along the analysis periods. Therefore, part of the behavior of capital cost in Brazil can be explained by the impact of the international financial crisis on the variables used to calculate the beta of companies or in the control variables. Thus, it is clear that there is the need of using economic variables to mitigate the international financial crisis effects on the assessment of impact of the IFRS adoption on the equity cost of open capital companies in Brazil.

Finally, the rise of indebtedness of companies in the sample in the period of mandatory IFRS adoption in Brazil is seen. Through the data analysis of Table 3 , it is noticed that the financial variables of companies change along the period analyzed.

Therefore, part of the effect that would be attributed to the IFRS adoption is due to the financial changes of companies. Nonetheless, the IBovespa behavior variation is seen in the period, besides the Brazil risk behavior, which had already been demonstrated. According to our results, increased financial disclosure and enhanced information comparability, along with changes in legal and institutional enforcement, seem to have a joint effect on the cost of capital, leading to a large decrease in expected equity returns.

Research limitations: The main limitation of the study is that the sample represents just one country. The systematic risk and the leverage affect positively the cost of stocks and therefore their market value.

The results are consistent with the financial principle establishing that the higher risk and the higher leverage, the higher cost of capital. This work is licensed under a Creative Commons Attribution 4. Publisher: OmniaScience. User user pwd Remember me.

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