Accounting comparability and the cost of capital




Park, Sung-Jin

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This dissertation consists of two essays that investigate the effects of accounting comparability on a firm's cost of equity capital. The first essay draws upon the analytical models of Wang (2014b) and Lambert, Leuz and Verrecchia (2007) [LLV] to question the prevailing conventional wisdom that comparability is a desirable characteristic of accounting information. Specifically, I perform new comparative static analysis of the LLV model and predict that higher financial statement comparability can be detrimental in the sense that it increases investors' perception of systematic risk, which leads to higher cost of equity capital. Consistent with the prediction, I find that a firm's cost of capital is positively associated with financial statement comparability. Further, I find that the effects of financial statement comparability does not operate indirectly through its influence over the information environment, which supports that financial statement comparability may directly affect investors' assessments of the sensitivity of a firm's cash flows to that of other firms and to the overall market.

In the second essay, I re-examine the cost of capital reduction following the EU's mandatory adoption of IFRS documented by Li (2010). Although the cost of capital reduction following IFRS adoption is claimed as a consequence of accounting standard harmonization enhancing cross-country accounting comparability, other streams of research suggest that growing economic integration among EU countries around IFRS adoption may also affect the post-2005 decline in the cost of capital in the EU. Therefore, I test whether a complementary effect between European economic integration and IFRS adoption contributes to the decline in the cost of capital following IFRS adoption in the EU. By using two EU Single Market indices as empirical proxies for economic integration, I find that the pricing of economic integration is incrementally negative following IFRS adoption, suggesting that the complementary effect exists between economic integration and accounting standard harmonization in the EU. This is consistent with the notion of "institutional complementarity" arguing that the impact of accounting standard changes would be interdependent to its smoother meshing with a society's institutional arrangements.


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Accounting Comparability, Cost of Capital, Economic Integration, IFRS, Institutional Complementarity