The joint effect of investor protection, IFRS and earnings quality on cost of capital: An international study

Abstract

This study tests the impact of earnings quality, investor protection, IFRS adoption and the joint effects of these on cost of capital (measured by cost of equity capital and cost of debt) in publicly listed firms in Euro zone and Asian countries. Using 199.516 firm year observations from 11 Euro zone and 8 Asian countries over the period 2000–2014, the findings confirm all research hypotheses. The results show that the cost of capital is lower in years after the adoption of IFRS as compared to the period before the adoption in Euro zone and Asian countries. A significant negative association has been found between the cost of equity capital and earnings quality in Euro zone and Asian countries. However, earnings quality is negatively correlated with cost of debt only in Euro zone countries. Similarly, the findings indicate that there is a significantly negative relationship between the cost of capital and most investor protection indexes in Euro zone and Asian countries. With regard to the joint effects of investor protection, earnings quality and IFRS adoption on the cost of capital, the results are controversial. In particular, the cost of capital has been found to be lower for firms with (a) strong investor protection and higher earnings quality, (b) higher earnings quality after the FRS adoption, and (c) strong investor protection after the IFRS adoption in Euro zone and Asian countries. © 2016 Elsevier B.V.