1 FINANCIAL CONSEQUENCES OF ADOPTING IASs Dr. Mohammad Al-Shiab

2 Structure Abstract Abstract. Introduction. Methodology and Hypothesis Methodology and Hypothesis. Results & Discussion of Findings Results & Discussion of Findings. Test of Hypothesis (H0). Test of Hypothesis (H0). Conclusion.

3 Abstract This research: Investigates the influence of adopting the IASs on cost of equity capital in Jordan for the industrial Jordanian companies (JIC) over the period Ending December 1998, IASs was made mandatory through the Companies Act No.22 of The univariate and multivariate approaches were adopted for testing the study hypothesis.

4 One of the claimed benefits of adopting an improved system of disclosure is that it leads to a reduction in the cost of capital to companies for two reasons: First, reduces transaction costs for investors resulting in greater liquidity of the market and greater demand for the firm ’ s securities. Second, reduces the estimation risk or uncertainty regarding the distribution of returns (e.g. There is uncertainty about the nature of their assets and their cash flows). Introduction

5 Introduction – Cont. Supplying information is affected by: Existing regulations. Costs associated with disclosure, such as information collection and processing costs.

6 Introduction – Cont. Companies competing for funds in international capital markets provide a wide variety of accounting information beyond that are required. Negative relation between the level of financial disclosure and cost of equity capital for their samples were documented using developed countries data, but a stronger test of the relationship between corporate information disclosures and the cost of equity capital is possible by choosing markets and information sets where corporate disclosure plays a larger role in market valuations such as the case of Jordan where there was an absence of national GAAP until From the above arguments, the issue will be investigated, whether IAS adoption has reduced cost of equity capital estimated by the expected return in a developing country like Jordan, experienced for long time loose and vague financial reporting requirements.

7 The capital asset pricing model (CAPM), arbitrage pricing theory (APT), and the Fama & French (1995) model are all possible explanations of the risk premium. The CAPM will be used as the maintained model of asset pricing. If the information change is sufficient to induce a behavioral change on the part of investors then we can expect to see the effect in beta and as a consequence in the cost of equity capital. Methodology and Hypothesis

8 The CAPM shows that it is only a security ’ s systematic risk, which is of interest to a well- diversified shareholder. The value of  j (beta) as systematic risk estimates is, therefore, of key importance to the investor. The major conclusion of the CAPM is that the price of security j will adjust so that its expected return E(rj) is given by: E(rj) = rf + (E(rm) – rf)  j E(rj): عائد السهم E(rm): عائد السوق  j: من معادلة market mode The expected depends linearly on the systematic risk (  j). When  j = 0, the expected return is the risk-free rate. When  j = 1, the expected return is the same as that for the market. The relationship between E(rj) and  j is known as the Security Market Line (SML). The beta will be estimated using the Market Model based on the logarithm weekly stocks’ and markets’ returns. Rij = αij + βj rmt + εij Therefore, the null hypothesis to be tested as follows “H0: There are no changes in the cost of equity capital regarding the adoption of the IAS for JIC listed on ASE and their shares traded over the period ”. Methodology and Hypothesis – Cont.

9 Results & Discussion of Findings The Table shows the descriptive statistics of the cost of equity capital estimated by the expected return by employing the CAPM formula:

10 As it can be seen from the above table, the cost of equity capital measure by expected return decreased over the period and then slightly increased over the period when it decreased again over the period Although such a move could be contributed to macroeconomic factors over the years , the increase in the level of disclosure in compliance with the IAS could be seen as another factor which influenced such cost, more specifically in the most recent year (2000) when such extent reached the highest level Results & Discussion of Findings – Cont.

11 Test of Hypothesis (H0)

12 Test of Hypothesis (H0)- Cont. Clearly it can be seen that, overall, the cost of equity capital decreased significantly over the total period since the null hypothesis were rejected for the pair suggesting that the decrease were ‘ cumulative ’. Such an influence was not significant between each pair of years, however, could be a reflection of the gradual increase in the extent of disclosure in compliance with IAS itself since such extent

13 Conclusion In summary, cost of equity capital, to some extent, found to be influenced by the extent of disclosure in compliance with IAS. Such an influence described as a ‘cumulative’ influence. such a result might be as a consequence of many factors, namely: 1) JIC were not fully complying the IAS, 2) recommending the IAS by accounting professions (JACPA) to be adopted in 1990, 3) Jordanian economy dependency on its neighbours, 4) region suffering continuous conflict

14 Questions