Early Evidence from Canadian Firms’ Choice Between IFRS and U.S. GAAP

• In Event: Concurrent Session 1.2: IFRS

Abstract

We study the unintended consequences of Canada abandoning Canadian Generally Accepted Accounting Principles (GAAP) and adopting International Financial Reporting Standards (IFRS) as the dominant accounting standard for fiscal years starting on or after January 1, 2011. Researchers and US regulators should be particularly interested in Canada’s recent experience due to strong similarities in the standards and financial reporting incentives of US and Canada and because Canada de facto allowed firms to adopt US GAAP in lieu of IFRS. Hence, some Canadian firms opted to use US GAAP, others transitioned to IFRS. First, we examine Canadian firms that before 2011 were considered foreign private issuers by the U.S. Securities and Exchange Commission, which were more likely to adopt US GAAP. We document that more Canadian firms report under US GAAP after Canada’s adoption of IFRS. As a result of this choice, 15% of foreign private issuers previously reporting under Canadian GAAP opted to voluntarily switch to US GAAP. We find that the firms more likely to choose IFRS are larger, in the developmental stage, or have fewer US operations. Second, we analyze the capital market effects of the adoption of either IFRS or US GAAP finding no or limited market reaction to Canada’s adoption of IFRS. Third, we investigate whether liquidity changed for Canadian firms around their adoption of either IFRS or US GAAP. Consistent with an increase in information asymmetry around IFRS adoption, bid-ask spreads increased for Canadian firms, that are not listed in the US, especially smaller firms.

Authors

• Brian Matthew Burnett, Indiana University Bloomington

• Elizabeth Gordon, Temple University

• Bjorn N Jorgensen, University of Colorado at Boulder

• Cheryl L. Linthicum, The University of Texas at San Antonio