Abstract
Purpose - This study examines the cost of equity capital for foreign firms listed in the U.S stock exchanges during 2004–2009, a period that the SEC has shifted from requiring foreign issuers to comply with the U.S. GAAP reconciliations to permitting the choice of IFRS in financial reporting. Design/methodology/approach - We compare the cost of equity of foreign firms in the IFRS reporting period to that in the U.S. GAAP reconciliation period. We also compare the cost of equity of foreign firms to that of matched U.S. firms during the two periods. Findings - Our results show that the cost of equity in foreign firms is higher during the IFRS reporting period (2007–2009) than the U.S. GAAP reconciliation period (2004–2006), foreign firms exhibit a constantly higher cost of equity than that of matched U.S. firms in both periods, and the size of cost of equity difference remains the same with respect to the regulatory change. We further show 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 U.S. because U.S. listings require more substantial disclosure. We find evidence that the SEC’s waiver of U.S. GAAP reporting does appear to reduce the bonding benefits for cross-listed foreign firms, particularly those from IFRS adoption countries.
Purpose - This study examines the cost of equity capital for foreign firms listed in the U.S stock exchanges during 2004–2009, a period that the SEC has shifted from requiring foreign issuers to comply with the U.S. GAAP reconciliations to permitting the choice of IFRS in financial reporting. Design/methodology/approach - We compare the cost of equity of foreign firms in the IFRS reporting period to that in the U.S. GAAP reconciliation period. We also compare the cost of equity of foreign firms to that of matched U.S. firms during the two periods. Findings - Our results show that the cost of equity in foreign firms is higher during the IFRS reporting period (2007–2009) than the U.S. GAAP reconciliation period (2004–2006), foreign firms exhibit a constantly higher cost of equity than that of matched U.S. firms in both periods, and the size of cost of equity difference remains the same with respect to the regulatory change. We further show 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 U.S. because U.S. listings require more substantial disclosure. We find evidence that the SEC’s waiver of U.S. GAAP reporting does appear to reduce the bonding benefits for cross-listed foreign firms, particularly those from IFRS adoption countries.
