The role of enterprise risk management on disclosure transparency and cost of equity capital in the international financial reporting standard period

The role of enterprise risk management on disclosure transparency and cost of equity capital in the international financial reporting standard period

This thesis empirically investigates the role of the enterprise risk management system implementation level in capturing firm managerial incentives. This system plays an important role in understanding the association between international financial reporting standards and the capital market. Listed firms in the Australian market were used for the period 2000-2010 for this purpose, and the Australian market was chosen because it is considered to be a strong legally enforced capital market. Descriptive statistic tests were used to study the sample characteristics. In addition, panel data is analysed in two regression models to achieve the study goals by providing a reference to compare the use of international financial reporting standards (IFRS) and generally accepted accounting principles (GAAP) periods in Australia, as Australia adopted IFRS as of January 1st 2005, thus enabling an analysis of their effect on firm incentives and cost of equity capital. Finally, the researcher used the results of the term 'IFRSA*ERMIL' in the two regression models, to capture the role of ERMIL on the economic consequences of IFRS adoption, through its indirect effect on firm incentives. The study results imply that IFRS adoption has a statistically significant negative effect on firm disclosures transparency _ with a positive effect on earning management_ when compared with GAAP adoption for the three models. Also, IFRS were found to have a statistically significant positive effect on cost of equity capital, which implies that the adoption of IFRS by Australian firms increases cost of equity capital for firm stock. Furthermore, implementing higher levels of ERM by Australian firms during the mandatory IFRS adoption period has no statistically incremental effect on the cost of equity capital, thus adopting higher level of ERM does not capture firm incentives in IFRS period. Together, implementing higher level of ERM by Australian firms in IFRS period, is not recognised by investors as a signal of more transparent disclosures nor does it encourage investors to use low discount rate to discount future cash flows, which as a result, does not have an effect on cost of equity capital. Consequently, these results suggest that the implementation of ERM by Australian firms does not reduce the contracual costs between investors and management, whilst adopting IFRS does. Future research may use other techniques and/or strategies other than ERM, to capture the firm incentives, and as a result, may have economic consequences.