The Impact Of New Accounting Standards On Capital Cost

On February,15th2006, China issued its new accounting standards, including1executive standard and38detailed standards. Regulators, financial statements preparers and users generally reach a consensus that the financial reports prepared under the new Chinese GAAP have higher accounting quality and thus will lower cost of capital for adopting companies. Three main streams of analytical research have provided possible explanations for this view based on either liquidity risk, estimation risk or misalignment risk in investment decisions.In this paper, I verify the existence of a relation between cost of equity and enacting the new Chinese GAAP by examining1170A shares concerning the Chinese market using data from2004to2009. My sample companies are separated into five different sectors:84from real estate sector,686from industry sector,99from commercial sector,200from integrated sector and101from public service sector. I use residual income model (RIV model) to calculate cost of equity for my sample companies. I also choose turnover rate as proxy of information asymmetry component of cost of equity. I use both descriptive and regression analyses by using cost of equity and turnover rate as dependent variables respectively. I also use controlling variables in establishing the regression equations. The results are of policy relevance to Chinese government to make more efforts on ensuring the effective execution of the new Chinese GAAP...