Analyzing the German accounting triad - "Accounting Premium" for IAS/IFRS and U.S. GAAP vis-à-vis German GAAP?

This paper critically examines the impact of voluntary adoption of Internationally Accepted Accounting Principles (IAAP, i.e., IAS/IFRS and U.S. GAAP) on the cost of equity capital in Germany. We find that (1) overall cost of equity-capital estimates in the Capital Asset Pricing Model (CAPM) for companies applying IAAP are significantly lower compared to those applying German GAAP, (2) an enhanced multi-factor model which incorporates the accounting-regime differences (called "GM model") absorbs the cost of equity-capital differences, and (3) changes of the institutional background in Germany and of the accounting standards lead to different cost of equity capital effects for subperiods of the 1998-2004 voluntary-adoption period, while particularly controlling for effects like self-selection, cross-listing, and New Market (Neuer Markt) listing. The central thesis advanced in this paper is that changes in the accounting standards and the institutional infrastructure can influence the impact of applying IAAP. Therefore, we suggest incorporating an accounting factor into the cost of equity-capital analysis.