Cost of equity capital of foreign firms: Did bonding benefits diminish after the SEC's waiver of IFRS to US GAAP reconciliation?

Abstract

Purpose

The purpose of this paper is to examine the cost of equity capital for foreign firms listed in the US stock exchanges during 2004‐2009, a period that the Securities and Exchange Commission (SEC) shifted from requiring foreign issuers to comply with the US GAAP reconciliations to permitting the choice of IFRS in financial reporting.

Design/methodology/approach

The cost of equity of foreign firms in the IFRS reporting period was compared to that in the US GAAP reconciliation period. Also, the cost of equity of foreign firms was compared to that of matched US firms during the two periods.

Findings

The results show that the cost of equity in foreign firms is higher during the IFRS reporting period (2007‐2009) than the US GAAP reconciliation period (2004‐2006); foreign firms exhibit a constantly higher cost of equity than that of matched US firms in both periods; and the size of cost of equity difference remains the same with respect to the regulatory change. Further, it is shown that the change in foreign firms' cost of equity is affected by their home country's IFRS use.

Originality/value

Bonding theory suggests a reduced cost of capital for foreign firms cross‐listed in the USA because US listings require more substantial disclosure. The paper finds evidence that the SEC's waiver of US GAAP reporting does appear to reduce the bonding benefits for cross‐listed foreign firms, particularly those from IFRS adoption countries.

Citation

Han, F. and He, H. (2013), "Cost of equity capital of foreign firms: Did bonding benefits diminish after the SEC's waiver of IFRS to US GAAP reconciliation?", Review of Accounting and Finance, Vol. 12 No. 3, pp. 268-285. https://doi.org/10.1108/RAF-Nov-2011-0044