Economics & Finance / Finance & Investment / Financial Regulation & Reform

IFRS Cuts Capital Costs by 47 Basis Points, But Only in Strong Law Countries

Li

In 2005, the EU forced all public companies to adopt IFRS, a major accounting reform. Did it actually lower their cost of equity capital? This video breaks down a landmark study published in The Accounting Review by Li (2010). The headline finding: mandatory adopters saw a 47 basis point drop in capital costs. But here's the kicker—this benefit only appeared in countries with strong legal enforcement, like Denmark and Finland. In weak enforcement countries (e.g., Greece, Italy), IFRS had zero effect, or even backfired. We'll explore the two key mechanisms—increased disclosure and enhanced comparability—and show how weak enforcement can turn a good standard into a bad deal. Perfect for finance pros, investors, and anyone curious about how accounting rules shape markets.