Mandatory adoption of IFRS and cost of capital: does country classification matter? Evidence from developed versus developing countries

We examine the economic consequences of mandatory adoption of International Financial Reporting Standards (IFRS) from firm level perspective, and across country classification (developing versus developed economy). Using a global sample of firms from 40 (45) countries from 1993-2016, and applying difference-in-differences design, we analyse the induced changes in the cost of equity (debt) capital following IFRS adoption. We find that mandatory adopters in developing countries are not more likely to experience significant decreases in the cost of equity in the post-adoption period than firms in developed countries. However, for cost of debt we identify an advantage of mandatory adopters over non-adopters in developing as well as in developed countries. At the same time, firms in developed countries show a larger decrease in the cost of debt than firms in developing countries. Overall, our findings suggest that mandatory IFRS adoption does not necessarily connote economic benefit outcomes and should be considered when promoting the worldwide introduction of IFRS, especially in developing countries.