Despite mandatory International Financial Reporting Standards (IFRS) adoption in Africa, weak compliance raises doubts about its impact on borrowing costs. Prior evidence from emerging economies is mixed. This study aims to examine the effect of IFRS adoption on the cost of debt and the mediating role of earnings quality in Ghana and Kenya, where enforcement remains relatively weak.
The study uses a balanced panel of 561 firm-year observations (2010–2020) from nonfinancial firms listed on the Nairobi Securities Exchange and the Ghana Stock Exchange. An explanatory design was applied, employing Ordinary Least Squares and two-stage least squares to address endogeneity.
Results show that while IFRS adoption is associated with slightly higher interest rates, its direct effect on reducing borrowing costs is insignificant. However, improved earnings quality, fostered by IFRS adoption, mediates this relationship by enhancing transparency and lender confidence.
This study focuses on Ghana and Kenya, limiting generalizability to other emerging economies. Its reliance on secondary quantitative data restricts insights into governance and implementation issues that qualitative methods could address. Methodological refinements, such as difference-in-differences and dynamic models, could strengthen causal inference. In addition, due to unavailable loan interest rate data, the cost of debt was proxied by interest expense to interest-bearing debt, which may not fully capture borrowing costs. Future research should also explore alternative earnings quality measures, such as conservatism, persistence, accruals quality, predictability and smoothness.
For firms, IFRS adoption alone does not reduce borrowing costs unless supported by high reporting quality. In Ghana, this requires stronger governance, staff training and compliance beyond minimum standards, while in Kenya, consistent and reliable disclosures are needed to curb earnings manipulation and build lender trust. Financial institutions should emphasize transparency and governance in credit assessments rather than mere compliance. Overall, managers should invest in robust accounting systems, stronger audits and a culture of accountability to improve earnings quality, reduce asymmetry and secure better lending terms.
Unlike studies assuming a direct IFRS–cost of debt link, this study highlights earnings quality as a mediator, showing that IFRS benefits in emerging economies are indirect and enforcement-dependent. It adds to the literature by providing evidence from underexplored African markets and clarifying how IFRS affects financing outcomes.
