IFRS IMPLEMENTATION AND COST OF EQUITY CAPITAL: THE ROLE OF FINANCIAL REPORTING QUALITY

Abstract

The study investigates the influence of International Financial Reporting Standards (IFRS) on financial reporting quality (FRQ) in Australia by examining the cost of equity capital in relation to firms' positions within their life cycle. Employing a Systematic Literature Review (SLR) approach, the researchers conduct an empirical analysis of publicly listed Australian firms to explore changes in financial behaviour preceding and following IFRS implementation. The findings indicate that the adoption of IFRS did not lead to consistent improvements in FRQ across various organisational contexts. Instead, the introduction of IFRS was associated with a decline in FRQ, largely due to the standards’ inherent complexity and the extensive professional judgement required by accountants. The study reveals that a firm’s financial life cycle stage significantly mediates the relationship between IFRS implementation and financial reporting outcomes. Organisations at a more advanced growth stage exhibited enhanced FRQ and reduced equity capital costs, likely attributed to their established governance frameworks and mature reporting mechanisms. In contrast, firms in earlier developmental phases, particularly during growth, experienced diminished or adverse effects from IFRS adoption, primarily due to insufficient preparedness. Additionally, the study highlights that financial market responses to IFRS are shaped by prevailing market conditions and investor sentiment. These findings emphasise the necessity for a nuanced approach to IFRS adoption that accounts for firm-specific characteristics and external influences, rather than relying solely on standardised implementation practices.