Academy of Accounting and Financial Studies Journal (Print ISSN: 1096-3685; Online ISSN: 1528-2635)


The Effect of Specific Risk Disclosure under IFRS 7 on Cost of Capital

Author(s): Phunphit Thitinun and Nontawan Yomchinda

This study investigates the effect of specific risk disclosure under IFRS 7 on a firm’s cost of capital in the principal of stock exchange of 62 countries that adopted IFRS between 2005 and 2014. The dictionary method was followed for the textual analysis of firms’ annual report footnotes using Python. A sample of 225 nonfinancial listed firms was generated by the intersection of firms with available annual reports and their representation in the DATASTREAM, I/B/E/S and WORLDSCOPE databases. Overall, the results of the random effects Tobit regression suggest that an incremental specific risk disclosure under IFRS 7 increased a firm’s cost of capital, supporting the hypothesis of this study. Moreover, the results also demonstrate that the cost of capital effect persisted after adding the market-based uncertainty proxy, bid-ask spread and return volatility, indicating that the improvement of a firm’s specific risk disclosure under IFRS 7 is associated with the perception of market sentiment as reflected by investors’ uncertainty proxy, and results in an increase in the firm’s cost of capital. These findings complement the literature on the linkage between a firm’s cost of capital and specific risk disclosure in accordance with the IFRS 7.

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