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IFRS arguments

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The International Financial Reporting Standards (IFRS) are a set of uniform, principle based standards that, in theory are applied consistently by companies in adopting countries. (Hail et al, 2006). Proponents and standard setters assert that IFRS adoption will produce a number of benefits including improved financial reporting and transparency, international comparisons, market efficiency, cross national information flows and global integration of local firms. (Gornik-Tomaszewski and S Showerman, 2010). There are other schools of thought which also have strong arguments against the adoption of IFRS. These arguments include that IFRS will not bring true comparability, that the IFRS will not be suitable for other countries, that …show more content…

Empirical studies support this argument and provide evidence that better disclosures reduce information asymmetry and increase market liquidity (Healy et al;1999;Leuz and Verrecchia, 2000;Bushee and Leuz,2005. In addition, better reporting and disclosure can affect the cost of capital. First, there is the notion that investors require a higher return from less liquid securities, which is in essence a liquidity premium (Chordia et al., 2000). Better disclosure can also lower investors’ estimation risks, that is, make it easier for investors to estimate firms’ future cash flows. This effect can directly reduce the required rate of return of an individual security as well as the market risk premium of the entire economy ( Lambert et al., 2007). Better disclosure can also improve risk sharing in the economy, either by making investors aware of certain securities or by making them more willing to hold them, which again reduces the cost of capital (Merton, 1987; Diamond and Verrecchia, 1991). Empirical studies generally support a link 2 between reporting or disclosure quality and firms’ costs of capital (Botosan and Plumlee, 2002; Hail and Leuz, 2006), IFRS and cross border investment Differences in the accounting standards are also viewed as an impediment to cross-border investment (Aggarwal et al., 2005). Thus, the global movement towards IFRS reporting may facilitate

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