Accounting Standards and Their Effect on the Expected Cost of Equity Capital: Evidence from the Swiss Stock Exchange

Abstract

Economic theory has established the link between information quality and the cost of equity capital (Easly and O'Hara 2004). An empirical implication of the theory is that firms' accounting standard choices and disclosure policies will positively affect their cost of equity capital. Prior studies in the United States have provided mixed results possibly because the disclosure environment is already strict (Leuz and Verrechia 2000). The current study empirically examines this link by comparing the cost of equity capital of Swiss firms that prepare their financial statements using International Accoutning Standards (IAS) with that of a sample of SWiss firms that use local accounting standards. IAS are a stricter set of standards that allow managers less alternative measurement methods and require higher disclosure levels than Swiss standards (Dumontier and Raffournier 1998). Using panel data for the period between 1993 and 1999 and a two-step model that controls for self-selection bias, the analysis documents a negative relationship between the expected cost of equity capital and IAS. The relationship remains even after controlling for firm specific risk factors.