The Effectiveness of International Financial Reporting Standards Adoption on Cost of Equity Capital: A Vector Error Correction Model

The purpose of this paper was to determine empirically whether adopting the International Financial Reporting Standards by Jordanian companies listed on the Amman Stock Exchange influenced its cost of equity capital over the period 1996-2000 using a Vector Error Correction Model. Expected return, extent of disclosure, financial leverage, and company size used as a proxy for cost of equity capital, disclosure, financial risk, and business risk, respectively. Moreover, Dickey-Fuller and Johansen Cointegartion tests were applied. Another tools used were the variance decomposition and Granger Causality tests. Results indicate that none of the independent variables significantly influenced the cost of equity capital.