Another argument suggesting favorable capital market effects is that IFRS reporting makes it
less costly for investors to compare firms across markets and countries e.g., Covrig et al. 2007; Yu
2009; Armstrong et al. 2010. As previously discussed, greater comparability may make financial
reports more useful to investors and other stakeholders, even if the quality of corporate reporting
does not improve. Moreover, using the same set of accounting standards across firms from different
countries likely improves outsiders’ ability to detect earnings management and accounting
manipulations, as it limits the set of permissible accounting treatments, which in turn should
improve firms’ reporting incentives. Thus, if the switch to IFRS does, in fact, improve the comparability
of firms’ reports, it has the potential to improve market liquidity and reduce cost of
capital.