Early Evidence from Canadian Firms’ Choice Between IFRS and U.S. GAAP*
Brian M. Burnett**
California Polytechnic State University, San Luis Obispo
Elizabeth A. Gordon
Temple University
Bjorn N. Jorgensen
London School of Economics
Cheryl L. Linthicum
University of Texas at San Antonio
March 2014
*
We thank Vic Anand, Alan Jagolinzer, Karen Jones, Grace Pownall, Shiva Rajgopal, Gregory Waymire, Michael
Welker, Eunyoung Whang (IAS discussant), and seminar participants at Baylor, Drexel, Emory, IESE, 2013
American Accounting Association Annual Meeting, 2013 European Accounting Association Meeting, and the 2013
International Accounting Section Midyear Meeting for helpful comments and suggestions. We thank Larry Ochoa
and Claire Veal for helpful research assistance.
**
Orfalea College of Business, Cal Poly, San Luis Obispo, 1 Grand Avenue, San Luis Obispo, CA 93405. Ph: (805)
756-1431. E-mail: [email protected].
Early Evidence from Canadian Firms’ Choice Between IFRS and U.S. GAAP
Abstract
For fiscal years starting on or after January 1, 2011, Canada abandoned Canadian Generally
Accepted Accounting Principles (GAAP) and adopted International Financial Reporting
Standards (IFRS) as the dominant accounting standard, yet de facto allowed firms to adopt U.S.
GAAP in lieu of IFRS. We document the unintended consequence that more Canadian firms
report under U.S. GAAP after Canada adopted IFRS. We find firms more likely to choose IFRS
are larger, in the developmental stage, have more R&D expenditures, fewer U.S. operations or
fewer U.S. shareholders. Further, the likelihood of IFRS adoption decreases if stockholders'
equity under U.S. GAAP exceeds Canadian GAAP in the year before IFRS adoption. Second,
consistent with an increase in information asymmetry around Canada's IFRS adoption, bid-ask
spreads increase for smaller Canadian firms not listed in the U.S. These results inform U.S.
regulators' current decision whether to allow U.S. firms the choice between U.S. GAAP and
IFRS.
JEL Code: M41
Keywords: IFRS, U.S. GAAP, Liquidity, Accounting Choice, Event Study.
2
“And it is actually true, in some respects, that the Canadian environment ... -- probably most
resembles the situation that the U.S. is going to be in if it makes a similar kind of decision.”
-Tricia O’Malley, Former AcSB and IASB member,
speaking of the Canadian decision to adopt IFRS
1. Introduction
In the quote from the U. S. Securities and Exchange Commission (SEC) July 2011 Roundtable
on International Financial Reporting Standards (IFRS), Ms. O’Malley is referring to Canada’s
decision to adopt IFRS and the potential implications of its experience as the U.S. considers
IFRS. As implied, the environments in Canada and the U.S. share many similarities such as
high-quality financial reporting and accounting standards, a market-orientation, strong
enforcement, and legal systems.
In our paper, we exploit the Canadian setting where standard
setters adopted IFRS as domestic GAAP but gave companies a de facto choice to use U.S.
Generally Accepted Accounting Principles (U.S. GAAP).1 We explore the determinants and
consequences of the choice. We find an unintended consequence that more Canadian companies
report using U.S. GAAP after the adoption of IFRS than before, which supports the notion that
companies will make the choice based on factors they perceive as important. As such, Canada’s
adoption of IFRS offers a unique setting to examine the debate about firms having a choice
among accounting standards, especially as the U.S. considers whether and how to adopt IFRS.
With the emergence of IFRS and U.S. GAAP as the predominant world accounting
standards, academics and standard setters are contemplating the advantages and disadvantages of
full convergence or the coexistence of two accounting standards.
Despite the large-scale
adoption of IFRS by over 100 countries in recent years, the vast majority of IFRS-adopting firms
never reported under U.S. GAAP since they previously reported only under the GAAP of their
1
Technically, only firms registered with the SEC were permitted to use U.S. GAAP instead of IFRS by Canadian
securities regulators. However, we note that firms had a de facto choice because firms could, though at some cost,
register with the SEC and report with U.S. GAAP. In fact, Nimin Energy Corporation and some other Canadian
firms publicly stated that they initiated cross-listing in the U.S. to be permitted to adopt U.S. GAAP.
home country. Further, in other IFRS adopting countries, companies were not given the choice
to adopt either IFRS or U.S. GAAP as they were in Canada.
To our knowledge, previous academic research considers only two experimental settings
that permit empirical examination of the effects of IFRS adoption relative to U.S. GAAP: (1)
Germany’s Neue Markt exchange that allowed the choice of U.S. GAAP or International
Accounting Standards (IAS), the predecessor to IFRS, and (2) U.S. cross-listed firms that were
required to reconcile differences between their IFRS and U.S. GAAP. Germany’s Neue Markt
exchange allows for an examination of the choice of accounting standards in a market where
domestic GAAP was considered low quality. Leuz (2003) finds insignificant differences in
measures of information asymmetry and market liquidity between Neue Markt firms choosing
IAS or U.S. GAAP.2 At that time, however, enforcement of standards was limited in Germany.
Germany’s enforcement body did not implement a proactive review of financial statements until
2005 (Christensen et al., 2011), which makes it difficult to infer whether the insignificant
differences in information asymmetry between IAS and U.S. GAAP documented in Leuz (2003)
are due to the similarity of the standards or lack of enforcement of the standards. The IFRS to
U.S. GAAP reconciliations of foreign private issuers (FPIs) provide a direct comparison of
reporting under IFRS and U.S. GAAP.3 Gordon et al. (2011) compare the earnings attributes of
IFRS and U.S. GAAP holding fixed the underlying cash transactions of the firm. They conclude
that while some earnings attributes do not differ due to accounting standards, other differences
due to financial reporting incentives persist even after the adoption of IFRS.4
2
Hwang and Lin (2010) note that some firms that voluntarily chose to report under U.S. GAAP have voluntarily
switched to IFRS, which replaced German GAAP when the EU adopted IFRS. For example, Euromicron Group, a
German manufacturer of fiber optic components, abandoned U.S. GAAP for IFRS in 2005.
3
During the period from 2004 through 2007, these foreign private issuers were required to reconcile from IFRS to
U.S. GAAP.
4
Further current research studies the effect of discontinuing the reconciliation requirements for foreign private
issuers. See, among others, Jiang et al. (2010) and Kim et al. (2012).
2
While informative, the generalizability of the above findings to the Canada and the U.S.
may be limited. First, due to self-selection bias arising because firms chose to voluntarily report
under U.S. GAAP when they listed on Neue Markt and in the U.S., respectively. Furthermore, if
financial reporting incentives are an integral determinant of earnings quality then it is difficult to
draw inferences from samples of foreign, predominantly European, firms that face different
reporting environments than North American firms.
For example, most countries in the
European Union have civil law legal origin, the exceptions being two common law countries:
Ireland and the United Kingdom.
Ball et al. (2000) document that legal origin is a co-
determinant of earnings attributes. Since both Canada and the U.S. have common law, the
applicability to North American firms of inferences regarding IFRS adoption from a sample of
firms located in the European Union’s predominantly civil law countries with lower intensity of
enforcement may be limited.
To mitigate these concerns, we study a recent sample of IFRS adopting firms based in
Canada which is a predominantly a common law country. Since Canadian and U.S. regulators
have historically designated each other a special consideration due to their proximity in
accounting standards and levels of enforcement procedures, any inferences based on a sample of
Canadian firms are more likely to carry over to U.S. firms than prior studies with lower
enforcement prior to IFRS adoption. With the more recent adoption of IFRS, companies are also
using updated IFRS standards that have benefited from the IASB-FASB convergence project. In
summary, the Canadian setting has three distinct advantages: (1) Canada permitted the choice
between IFRS and U.S. GAAP, (2) the Canadian and U.S. environments are more similar than
other countries might be, and (3) Canada recently adopted IFRS.
3
We examine two main aspects of IFRS adoption in Canada. First, we describe and
investigate initial reporting choices Canadian firms make.5 While Canada adopted IFRS on or
after January 1, 2011, standard setters gave companies the de facto option to use IFRS or U.S.
GAAP. Those Canadian firms that had cross-listed in the U.S. and maintained their FPI status
did not need special permission from regulators to use U.S. GAAP. Other Canadian firms
needed regulatory approval to use U.S. GAAP. Interestingly, we find more firms report under
U.S. GAAP after Canada adopted IFRS. Before Canada’s IFRS adoption, 48 out of 245 crosslisted companies reported under U.S. GAAP, or about 20%. After, 45 of these continued to
report under U.S. GAAP suggesting they were minimizing the costs of switching standards. Of
the 197 cross-listed companies that previously reported under Canadian GAAP, we document
that at least 29 or about 15%, voluntarily choose U.S. GAAP over IFRS, implying that
companies differ in the perceived costs and benefits of their choice of accounting standards.6 We
investigate the determinants of the choice of IFRS versus U.S. GAAP, finding cross-listed
companies choosing IFRS are larger, in the developmental stage, have more R&D expenditures,
fewer U.S. operations or fewer U.S. shareholders. Further, consistent with the impact of the
accounting standards on reported results playing an important role on firms’ standard choice, we
find the likelihood of IFRS adoption decreases if stockholders' equity under U.S. GAAP exceeds
Canadian GAAP in the year before IFRS adoption.
5
Competition is likely to be ongoing as Canadian firms assess whether IFRS or U.S. GAAP best meets their
reporting needs. For example, Encana initially switched to IFRS from Canadian GAAP, but then announced that for
fiscal 2012 it was switching to U.S. GAAP, stating “Adopting U.S. GAAP will make it easier for investors to
compare Encana’s financial performance with its peer companies, most of which are based in the United States.
Consistent with current practice, Encana will report its 2011 year-end financial results in February 2012 in
accordance with International Financial Reporting Standards (IFRS). Starting in April 2012, Encana will report its
first quarter results using U.S. GAAP.”
6
In addition to these 29 firms, five or fewer Canadian firms may have been mandated to switch to U.S. GAAP if the
U.S. SEC determined that these firms no longer qualified for foreign private issuer status.
4
Second, we investigate whether market liquidity changes with the adoption of IFRS
versus U.S. GAAP. Consistent with research examining IFRS adoption in other countries (e.g.,
Daske et al. 2008; Christensen et al. 2011), liquidity is a proxy for economic outcomes because
theory predicts higher transparency reduces information asymmetries which in turn increases
liquidity (e.g., Glosten and Milgrom 1985; Diamond and Verrecchia 1991; Verrecchia 2001).
We examine three common measures of liquidity: share turnover, zero returns days, and bid-ask
spread. If IFRS is more (less) informative to the capital markets than U.S. GAAP or Canadian
GAAP thereby reducing (increasing) information asymmetry, then we expect that liquidity will
increase (decrease) after the adoption of IFRS.
If the accounting standards are similarly
informative, we expect no difference. We use two samples to examine the liquidity implications:
(1) U.S. cross-listed firms and (2) non-U.S. cross-listed firms. In the U.S. cross-listed sample,
we find no differences in liquidity before and after the adoption of IFRS, implying those
companies interacting with the U.S. market do not face negative consequences when adopting
IFRS. In the non-U.S. cross-listed sample, we find mixed results using the three different
liquidity measures. Results of bid-ask spreads suggest lower liquidity but share turnover and
zero returns data suggest no difference. Further investigation shows that the lower bid-ask
spreads are concentrated in smaller Canadian firms.
Our paper contributes to the debate about permitting two accounting standards to coexist.
When given a choice of two high quality accounting standards, we find that companies will base
their decision on their perceived costs and benefits of the accounting standard. The unintended
consequence of Canada adopting IFRS – that more Canadian companies report using U.S. GAAP
– supports the notion that companies will make the choice based on factors they perceive as
important. Specifically, we find that Canadian FPIs are more likely to choose U.S. GAAP if they
5
have more operations in the U.S., fewer operation in IFRS reporting countries, less influence in
their local Canadian market (in terms of size), and have less complex accounting. We find no
evidence that cross-listed companies are penalized or rewarded by the market for having the
choice of standards. Similarly, Canadian firms switching from Canadian GAAP to IFRS are also
not adversely affected, except for smaller firms.
Regulators, standards setters, and listed companies should be interested in our findings.
As U.S. regulators consider allowing or requiring IFRS, the Canadian experience suggests that
when moving from one set of high quality accounting standards to another in a high enforcement
regulatory regime and given a de facto choice, companies gain as they tradeoff their firmspecific costs and benefits. Our results also suggest that the move from one high quality
accounting standard to one (or two) other high quality accounting standard(s) has limited capital
market effects. Standard setters should be interested in the financial statement users’ assessment
of changing from one standard to another. Finally, if U.S. companies are given the choice, U.S.
managers should also be interested in how the capital markets perceive the change.
The paper proceeds as follows. Section 2 summarizes the arguments for and against full
convergence or permitting two accounting standards to exist side by side in a market. Section 3
offers a brief literature review. Section 4 investigates Canadian firms’ choice of accounting
standards. Section 5 analyzes the liquidity effects of IFRS adoption in Canada. Section 6
concludes and suggests avenues for future research. The Appendix further details the Canadian
path to IFRS and its market consequences.
6
2. Competition among accounting standards
Academic literature discusses the costs and benefits of full convergence or continued
competition between IFRS and U.S. GAAP accounting standards. Dye and Sunder (2001) detail
arguments for and against competition among accounting standard setters, and for and against
allowing U.S. corporations to issue financials in accordance with standards promulgated by
either FASB or International Accounting Standards Board (IASB). A core argument in favor of
competition among standards is that competition increases the long run efficiency of accounting
standards. The standard-setting organizations are likely to be more responsive to constituents’
demand for better standards than with a monopolist standard setter. A countervailing concern,
however, is that competition may lead to a “race to the bottom”. Although motivated by this
debate, this paper cannot speak directly to long run effects (if any) of absence of convergence but
merely to firms’ choice of accounting standards and the resulting unintended consequences.
While arguments have been made both for and against competition, the SEC has followed
a strategy of converging U.S. GAAP with IFRS and is contemplating full adoption of IFRS. In
September 2002, the IASB and FASB signed a Memorandum of Understanding, “The Norwalk
Agreement,” pledging to make their existing financial reporting standards fully compatible as
soon as practicable. Convergence, though, has also been criticized for a lack of competition.
Kothari et al. (2010) assert, that, rather than converging U.S. GAAP with IFRS, competition
between the FASB and the IASB would allow GAAP to better respond to market forces absent
regulation of the choice of accounting standards.
As academics debate the merits of single versus multi-GAAP reporting environments, the
SEC is considering whether to permit the more than 10,000 U.S. domiciled filers to (a) continue
the currently required reporting under U.S. GAAP, (b) require the adoption of IFRS, or (c) allow
7
U.S. companies to choose between either IFRS or U.S. GAAP. The original roadmap for the
consideration of mandatory adoption of IFRS by U.S. issuers was published in 2005, and
deliberations continue.
To illustrate, consider the following quote from SEC Chairman
Christopher Cox, March 6, 2007 (SEC 2007):
“That original commitment [to the Roadmap] … meant that IFRS and U.S. GAAP
would someday compete freely in America's capital markets, and that two
accounting systems would operate side by side — at least until the process of
convergence concludes with actual convergence, and there is truly one global
accounting standard and seamless international comparability of reporting. It
meant that issuers, markets, and investors would have a choice — because they,
not the government, will decide between IFRS and GAAP.”
More recently, the SEC hosted a Roundtable in July 2011 to discuss IFRS, in which Richard
Larsen of Duff and Phelps, LLC commented, “I think that, in many ways, the last several years,
or post-Norwalk Agreement, that the healthy tension between the FASB and the IASB has
created better standards” (SEC 2011).
Canada’s recent experience with IFRS adoption provides potential insights about what
might happen if the U.S. fully adopts IFRS or permits firms to choose between the two
standards. As Tricia O’Malley, a former Canadian Accounting Standards Board (AcSB) member
and IASB member, stated, Canada is “the canary in the coal mine on behalf of this whole process
[in the US]” (SEC 2011).
Canada permitted competition among accounting standards for
Canadian firms registered with the SEC. These firms were allowed to choose between the IFRS
and U.S. GAAP. Such competition is consistent with a long-standing tradition for competition
between provinces in Canada concerning its legal standard setting (Daniels, 1991). In summary,
Canada’s IFRS adoption experience provides unique insights about the unsettled debate over
whether the SEC should permit U.S. firms to choose between IFRS and U.S. GAAP.
8
3. Related research on IFRS
The large scale adoption of IFRS has prompted accounting researchers and regulators to consider
the preferred attributes of accounting standards.7 Some argue that adoption per se is more a label
than an actual change in financial reporting quality. While the prevailing accounting standards
(prior GAAP or IFRS) might be of importance, the surrounding institutions and enforcement
mechanisms that help shape managers financial reporting incentives could be equally – or even
more – important. Given the flexibility within every accounting standard, the financial reporting
incentives could a priori play as an important role as the rules and standard themselves.
The use of IFRS by over 100 countries has led to a number of insightful academic
studies, mainly focused in the European Union (EU). For example, Armstrong et al. (2010)
study the European market reaction to IFRS adoption announcements. Daske et al. (2008)
investigate the firm characteristics of early IFRS adopters in the EU.
Henry et al. (2009) and Gordon et al. (2011) consider the effect of FPIs’ adoption of
IFRS. For example, Henry et al. study the reconciliations between IFRS and U.S. GAAP for 75
US-listed European firms.
They find that net income reported using IFRS is statistically
significantly higher than net income reported using U.S. GAAP. Further, the reconciliation from
IFRS to U.S. GAAP was value relevant. However, the U.S. SEC removed the reconciliation
requirement for IFRS filers for reporting periods beginning in 2008. Therefore, while some nonU.S. firms can report using either IFRS or U.S. GAAP, U.S. firms have no choice but to provide
the SEC with financial statements prepared using U.S. GAAP.
Hail et al. (2010a,b) provide a conceptual discussion of the economic arguments for and
against the adoption of IFRS, and detail political factors influencing the consideration of IFRS
adoption in the United States. The authors conclude with a discussion of future scenarios for
7
For recent survey papers see, Hail et al. (2010a,b) and Kothari et al. (2010).
9
U.S. accounting standards, including the elimination of U.S. GAAP, or potential co-existence of
U.S. standards and IFRS in U.S. capital markets.
Canadian IFRS adoption
The Canadian Accounting Standards Board (AcSB) sets accounting standards for
Canadian entities outside of the public sector. The Board actively considered harmonization and
convergence of Canadian GAAP with IFRS and U.S. GAAP. Prior to 2004, two of the AcSB’s
main objectives were to eliminate or minimize differences first with U.S. GAAP and second with
International Accounting Standards (Discussion Paper of Accounting Standards in Canada:
Future Directions June 24, 2004). To work to eliminate the differences with U.S. GAAP, each
year the AcSB performed a detailed review of differences between Canadian GAAP and U.S.
GAAP for a random sample of Canadian firms that reported reconciliations from Canadian
GAAP to U.S. GAAP. The AcSB then developed standards that eliminated or minimized these
differences.
After considering their constituent’s input, on February 10, 2005, the AcSB proposed
adopting IFRS in full to its oversight body, the Accounting Standards Oversight Council, while
allowing entities that wanted to use U.S. GAAP to do so.8 On March 31, 2005, the AcSB sought
comment on its proposal to adopt IFRS (Leuz and Wysocki 2006). On April 15, 2005, the U.S.
SEC introduced a possible road map to eliminate the reconciliation requirement for IFRS. On
January 10, 2006, the AcSB ratified its plan to adopt IFRS over a five-year transition period,
while allowing SEC registrants to continue reporting with U.S. GAAP. On November 15, 2007,
the U.S. SEC voted to eliminate the reconciliation requirement for FPIs reporting under IFRS.
An important final step in Canada’s IFRS adoption was the AcSB’s confirmation of the IFRS
8
For a more thorough discussion of why Canada adopted IFRS, please see the Appendix and the AcSB’s 2011
report, “Adoption of International Financial Reporting Standards: Background and Basis for Conclusions.”
10
changeover with the announcement that Canadian publicly accountable enterprises would be
required to adopt IFRS for fiscal years beginning on or after January 1, 2011.
Canadian GAAP and U.S. listed companies
In adopting IFRS, the AcSB required all publicly accountable enterprises to apply IFRS
after firm years beginning on or after January 1, 2011. The provincial securities regulators, who
have authority over the application of accounting standards, gave Canadian companies crosslisted in the U.S. the option to choose IFRS or U.S. GAAP. The provincial securities regulators
also permitted firms to petition for special permission to use U.S. GAAP without listing in the
United States. The provincial securities regulators required companies to begin reporting under
IFRS or U.S. GAAP for the first quarter of 2011 (e.g., Ontario Securities Commission 2011).
Prior to Canada’s adoption of IFRS, Canadian and U.S. regulators determined that
Canadian GAAP and U.S. GAAP were allowable alternatives for cross-listed companies under
the Multi-jurisdictional Disclosure System (MJDS).9 Canadian regulators accepted U.S. GAAP
for domestic reporting.
U.S. regulators accepted Canadian GAAP for FPIs, without
reconciliation to U.S. GAAP.10 Canada was the first country for which the SEC accepted
domestic GAAP reporting for FPIs. In November 2007, the U.S. Securities and Exchange
Commission exempted all non-US-based firms that report under IFRS from reconciliation.
Therefore, as Canadian firms switch to IFRS, they will maintain the exemption from
reconciliation requirements.
9
Canadian regulators also permitted these Canadian firms to report under U.S. GAAP.
This exemption from reconciliation based on the similarity in the standards is consistent with research by Webster
and Thornton (2005) finding no overall difference in accrual quality between Canadian firms reporting under
Canadian GAAP and U.S. firms reporting under U.S. GAAP.
10
11
The distinction between the SEC’s requirements for FPIs and registrants is important in
our sample selection and research design.11 FPIs are not required to report under U.S. GAAP.
They could use their domestic reporting standards and reconcile to U.S. GAAP (where required).
For those FPIs reporting under IFRS, the SEC eliminated the reconciliation in November, 2007.
Some Canadian firms listed in the U.S. do not qualify to be FPIs, and must then follow the same
higher reporting requirements as U.S. companies, including using U.S. GAAP.
Notwithstanding the previous arguments, minor differences in accounting rules between
U.S. GAAP and Canadian GAAP did persist prior to and during our sample period.
Bandyopadhyay et al. (1994) investigate a sample of firms that were listed both on Toronto and
on a U.S. stock exchange between 1983 and 1989.12 Overall, they find that earnings scaled by
market capitalization are 2% lower under U.S. GAAP than Canadian GAAP. Some of their main
source of differences in accounting rules pertain to foreign exchange gains or losses on foreign
long-term debt, early extinguishment of debt, extraordinary items, and interest capitalization of
self-constructed assets [see Table 1 on page 265].
11
The U.S. SEC defines a FPI as any foreign issuer that does not meet either of the following two conditions: (i)
More than 50 percent of the outstanding voting securities of such issuers are directly or indirectly owned of record
by residents of the U.S.; and (ii) any of the following: (A) The majority of the executive officers or directors are
U.S. citizens or residents; (B) More than 50 percent of the assets of the issuer are located in the U.S.; or (C) The
business of the issuer is administered principally in the U.S..
12
Their sample is non-random since firms choose to cross-list in the U.S., due to higher anticipated need for
bonding with U.S. institutions, capital or visibility.
12
4. Firms’ Accounting Standard Choice
Data
Our sample consists of Canadian firms in Compustat that were required to choose IFRS or U.S.
GAAP by May 31, 2012.13 The AcSB required Canadian companies with fiscal years beginning
on or after January 1, 2011 to adopt IFRS and begin reporting under IFRS in the first quarter of
2011.14 Because of the MJDS, the provincial securities regulators allowed SEC registrants to
choose between IFRS and U.S. GAAP, and similarly required them to begin reporting using one
of these two accounting standards for the first quarter of 2011 (e.g., Ontario Securities
Commission 2011). We obtain financial data and prices from Compustat.
Table 1, Panel A, details our sample selection.
Of the 1,445 Canadian firms in
Compustat, 135 insurance and investment companies deferred their decision until 2013 and the
remaining 1,310 firms choose either IFRS or U.S. GAAP. Specifically, 92 adopted U.S. GAAP
and 1,218 adopted IFRS.
Table 1, Panel B, presents the accounting standards firms adopt conditional on their USlisting status and previous accounting standard. We focus on three important categories of firms.
The first category includes the 48 firms that were listed in the U.S. and reporting with U.S.
GAAP prior to 2006.15 Many of these firms subsequently lost their FPI status and became
required by the SEC to report using U.S. GAAP, which is why all but three firms continue to use
U.S. GAAP. The second category represents firms listed in the US, but initially reporting under
13
We examined whether firms go private rather than adopt IFRS, and document that 23 firms went private between
2009 and 2011. This suggests that the costs of IFRS adoption did not lead to a significant number of going-private
transactions.
14
Due to delayed International Accounting Standards Board (IASB)’s projects involving investment companies,
insurance contracts, and accounting for rate-regulated entities, the provincial securities regulators allowed
investment companies, insurance companies, and rate-regulated entities to delay adoption of IFRS until fiscal years
beginning on or after January 1, 2013 (2012 for rate-regulated entities). Our sample includes rate-regulated entities
that made their adoption choice by May 31, 2012.
15
On January 10, 2006, Canada formally announced it would abandon Canadian GAAP in favor of IFRS. If a
firm’s inception is in 2006 or later, we label the firm based on its accounting standard used in its first year.
13
Canadian GAAP. These firms are arguably the most interesting because they were permitted to
choose between IFRS or U.S. GAAP. Of the 197 firms in this category, we note that five firms
lost their FPI status and were required by the SEC to begin reporting with U.S. GAAP. The
remaining 192 firms had a choice between IFRS and U.S. GAAP – 29 (15%) chose U.S. GAAP,
while 163 (85%) chose IFRS. The third category represents firms not listed in the US, which
meant that they had to report under Canadian GAAP prior to 2006. For these firms to be able to
adopt U.S. GAAP instead of IFRS, they would have (1) become an SEC registrant or (2)
obtained special permission from Canadian securities regulators. Thirteen firms in this category
did adopt U.S. GAAP – eight became SEC registrants and five obtained special permission from
securities regulators.16 The vast majority of firms in this category, 99%, adopted IFRS.
Table 1, Panel B, documents an unintended consequence of Canada’s adoption of IFRS.
Before Canada adopted IFRS, we observe that 48 out of 245 cross-listed companies previously
reported under U.S. GAAP, or about 20%. After Canada adopted IFRS, the number of firms
reporting under U.S. GAAP nearly doubled to 92. Nevertheless, a majority of firms choose
IFRS.
Determinants of firms’ accounting standard choice
We examine the determinants of U.S.-listed Canadian firms’ choice between IFRS and
U.S. GAAP. We focus on U.S.-listed Canadian firms because they were given a choice between
IFRS and U.S. GAAP, without having to incur additional costs to obtain special permission to
use U.S. GAAP or register with the SEC. We exclude those Canadian firms that originally
reported under U.S. GAAP because the SEC required many of these to report under U.S. GAAP
16
The five firms that obtained special permission to adopt U.S. GAAP without becoming SEC registrants are rateregulated entities that were allowed to adopt U.S. GAAP until January 1, 2015 due to uncertainty under IFRS related
to rate-regulated accounting.
14
as they did not qualify as FPIs. This results in a sample of U.S.-listed firms that originally
reported under Canadian GAAP and then had a choice between IFRS and U.S. GAAP.
We are not the first to examine firms’ choices between accounting standards. Leuz and
Verrecchia (2000) study the determinants of German firms’ choices between German GAAP and
International Reporting standards (U.S. GAAP and IAS).
They find the choice of an
International Reporting standard is positively associated with firms’ performance, measured as
return on assets (ROA), and financing needs, measured as capital intensity and a listing in the
U.S. or UK. Leuz (2003) studies firms trading in Germany’s New Market during the years 1999
and 2000 where German firms chose between U.S. GAAP and IAS, the predecessor to IFRS.
His primary motivation was to provide evidence about the quality of IAS relative to U.S. GAAP.
Assuming U.S. GAAP is associated with higher quality corporate disclosure, he hypothesizes
that the choice of U.S. GAAP is a function of firm size (+), financing needs (+), and firm
performance (+/-).
He finds that the choice of U.S. GAAP is significantly and positively
associated with financing needs, which he notes, is consistent with a perception at that time that
U.S. GAAP was preferable for firms with large future financing needs because it allowed them
better access to the U.S. capital markets.
He does not find the choice of U.S. GAAP is
significantly associated with firm size or firm performance.
We believe reexamining the choice between IFRS and U.S. GAAP is important. The
SEC is contemplating whether to require U.S. public companies to (a) retain U.S. GAAP, (b)
adopt IFRS, or (c) permit firms to choose between the two standards. As the most similar capital
market to the US, Canada is the nearest setting, both geographically and in terms of accounting
standards and financial reporting incentives, to best possibly understand what U.S. firms might
choose if permitted to choose between IFRS and U.S. GAAP. Finally, the study of Canadian
15
firms listed in the U.S. enables more robust analysis than a study of accounting choice by nonU.S. listed companies. The financial reporting incentives of firms are similar to U.S. firms; they
are all listed in the U.S. and provided reconciliations from Canadian GAAP to U.S. GAAP in
their SEC filings prior to adopting either IFRS or U.S. GAAP.
We model the choice between adopting IFRS or U.S. GAAP as a function of the firmspecific costs and benefits of adoption. Specifically, we use the following probit regression to
examine this choice:
Prob(IFRS=1) = F(β0 + β1 SE Comparabilityt-1 + β2 R&D Intensityt-2 +
β3 IFRS vs. US Operationst-2 + β4 US Ownershipt-2 +
β5 Leveraget-2 + β6 DSEt-2 + β7 Sizet-2 + β8 ROAt-2 + εt)
(1)
We include industry fixed effects and use robust standard errors. We calculate the variables in
our model two years prior to firms’ adoption of IFRS or U.S. GAAP because the decision to
adopt IFRS requires a two-year transition period, and this is likely when most firms made the
choice between the two standards.
As firms weighed the costs and benefits of choosing between the accounting standards,
they commonly disclosed three primary determinants informing their decisions: (1) the impact on
reported results, (2) comparability with industry peers, and (3) the needs of key stakeholder
groups (e.g., shareholders, lenders, etc.).17 SE Comparability and R&D Intensity proxy for the
impact on reported results. IFRS vs. US Operations focuses on comparability with peer firms.
US Ownership considers stakeholders’ needs. Additionally, we include proxies for the relative
costs of IFRS adoption versus US GAAP and control for firm size and performance.
17
As an example, Magna International Inc. stated that in making its decision between the two standards, the board
of directors “considered many factors, including, but not limited to (i) the changes in accounting policies that would
be required and the resulting impact on our reported results and key performance indicators, (ii) the reporting
standards expected to be used by many of our industry comparables, and (iii) the financial reporting needs of our
market participants, including shareholders, lenders, rating agencies and market analysts.”
16
The impact of U.S. GAAP relative to IFRS on reported results is likely a primary
determinant of firms’ choice between the two standards. Specifically, firms are more likely to
choose IFRS than U.S. GAAP when IFRS portrays the firm in a more favorable light than U.S.
GAAP, and vice versa. Ideally, we could observe IFRS and U.S. GAAP reported numbers for
the same firm in the same year prior to their choice of accounting standard. Unfortunately, we
are unable to observe IFRS and U.S. GAAP reported numbers for firms that choose US GAAP.18
We are, however, able to observe Canadian GAAP and U.S. GAAP reporting in the year prior to
their choice of accounting standard for all but 10 firms because most firms provided
reconciliations to U.S. GAAP. We posit that when Canadian GAAP is less comparable to U.S.
GAAP in an unfavorable way, firms are more likely to choose U.S. GAAP. When Canadian
GAAP portrays a firm in a more favorable light than U.S. GAAP, firms are more likely to choose
IFRS. We examine the comparability stockholders’ equity under Canadian GAAP and U.S.
GAAP as a cumulative summary measure of which standard portrays the net assets of a firm in a
more positive light.
We calculate the variable SE Comparability as Canadian GAAP
stockholders’ equity less U.S. GAAP stockholders’ equity scaled by the absolute value of
Canadian GAAP stockholders’ equity.19 We expect that SE Comparability will be positively
associated with choosing IFRS.
We further consider the impact of the standard choice on reported results by focusing on
a key difference between IFRS and U.S. GAAP. Under U.S. GAAP, R&D is generally expensed
as incurred, with capitalization of software being a notable exception. In contrast, IFRS requires
18
For firms that choose IFRS, IFRS adoption requires retroactive disclosure of the prior year under IFRS making it
possible to observe firms’ reporting under Canadian GAAP and IFRS. Further, all but ten of these firms provided a
reconciliation to U.S. GAAP for the year prior to IFRS adoption. Thus, in the year prior to IFRS adoption, for firms
that adopt IFRS, we can observe their reporting under Canadian GAAP, IFRS, and US GAAP.
19
Ten firms in this sample have negative stockholders’ equity. We obtain qualitatively similar results if we delete
these firms from our analysis.
17
capitalization of certain R&D expenses. As a consequence, we predict that firms that reported
high R&D expenses under Canadian GAAP (R&D Intensity) are more likely to switch to IFRS.
Firms are more likely to choose IFRS (U.S. GAAP) when that standard provides for
enhanced comparability with a firms’ peer group.20 Canadian firms with significant operations
in the U.S. (outside the U.S.) are likely to have peer firms that use U.S. GAAP (IFRS). We use
IFRS vs. US Operations to measure whether more of a firm’s foreign operations are in or outside
the U.S. IFRS vs. US Operations is calculated as the proportion of firm’s assets located outside
of Canada and the U.S. less the proportion of firm’s assets located in the U.S.21 We expect that
IFRS vs. US Operations is positively associated with choosing IFRS, consistent with a higher
likelihood of a firm’s peers using IFRS.
We consider the role of stakeholders’ needs in the between the two standards by focusing
on shareholders.
Shareholders are likely the key constituent affecting this decision.
Accordingly, we proxy for this using US Ownership which is the percentage of common shares
held by U.S. institutional investors. We expect that US Ownership will be negatively related to
choosing IFRS.
Since changing accounting standards is costly, we consider two types of firm-specific
costs associated with the adoption of IFRS versus U.S. GAAP. In either case, adopting a new
accounting standard likely entails renegotiation of contracts, where the contractual terms are
based on accounting numbers. For Canadian firms, renegotiation costs are likely lower when
adopting U.S. GAAP than IFRS because each of these firms was already providing a
20
For example, Canadian Pacific Railway Limited stated, “CP commenced reporting its financial results using U.S.
GAAP, which is consistent with the current reporting of all other North American Class I railways.”
21
Alternatively, if we include two variables, one for U.S. operations and one for operations outside the US, we
obtain qualitatively similar results for these variables and the other variables in our model.
18
reconciliation from Canadian GAAP to U.S. GAAP in their U.S. filings.22 Leverage, long-term
debt divided by total assets, captures the costs involved in renegotiating debt covenants. IFRS
adoption may move firms closer or farther from their debt covenants depending on the effect of
IFRS adoption. For example, IFRS adoption permits firms to revalue their property, plant and
equipment to fair market value.
If a revaluation results in a higher property, plant, and
equipment value then IFRS adoption may reduce a firm’s leverage ratio and therefore reduce
debt-covenant renegotiation costs.
Second, we consider that many of the sample firms are considered Development Stage
Enterprises (DSEs)23, which are focused on establishing a new business where either their
primary operations have not yet begun or no significant revenues have been earned. Willenborg
(1999) argues that the financial statements of a typical DSE contain little meaningful accounting
information and do not have more audit-intensive accounts such as revenues, inventory and
accounts receivable. Therefore, the costs to adopt IFRS for DSEs are relatively lower than for
non-DSEs due to lower accounting complexity. DSE is equal to one if a firm is a DSE, and zero
otherwise.
Finally, we control for Size, the log of market value, which captures size-related
differences, such as the information environments. ROA, net income divided by total assets, is
our measure of performance. Since IFRS and U.S. GAAP are largely viewed as of similar
quality in European Union countries with low enforcement (e.g., Leuz 2003; Barth et al. 2008;
22
Bandyopadhyay et al. (1994) find that earnings scaled by market capitalization are 2% lower under U.S. GAAP
than Canadian GAAP. Since the time of Bandyopadhyay et al. (1994)’s study, U.S. GAAP and Canadian GAAP
have become even more similar. From 1995 to 2004, the AcSB focused on harmonizing Canadian GAAP with U.S.
GAAP by adopting standards that reduced differences between the two accounting standards (Discussion Paper of
Accounting Standards in Canada: Future Directions June 24, 2004).
23
ASC 915-10-05, IFRS 3.
19
Gordon et al. 2011), a priori it is unclear whether and how Size or ROA will relate to firms’
choices between IFRS and U.S. GAAP in Canada and U.S. with higher level of enforcement.
Empirical results for determinants of firms’ accounting standard choice
Table 2 presents descriptive statistics for the 170 US-listed firms with a choice between
IFRS and U.S. GAAP and with necessary financial information.24
The differences in SE
Comparability and R&D Intensity are consistent with differences in reported results playing an
important role in choosing between IFRS and U.S. GAAP. The mean and median of SE
Comparability are statistically significantly larger for firms that choose IFRS based on a t-test of
difference in means and the non-parametric Wilcoxon signed-rank test, respectively. The mean
of -0.12 for firms that choose U.S. GAAP indicates that on average stockholders’ equity of firms
that choose U.S. GAAP is larger under U.S. GAAP than Canadian GAAP. The positive mean
and median indicate that the opposite is true for firms that adopt IFRS. This is consistent with
firms choosing the standard that portray themselves in the most favorable light. The nonparametric Wilcoxon signed-rank test indicates R&D Intensity is higher for firms that choose
IFRS. This is consistent with firms with these development expenses preferring to capitalize
them. The low average and median for R&D Intensity is attributable to the low percentage of
firms that have R&D expenses (18 percent).
The differences in IFRS vs. US Operations suggest that comparability with peer firms
plays an important role in firms’ choices between the two standards. The mean (median) of 0.25 (-0.15) for IFRS vs. US Operations for firms that choose US GAAP indicates on average
they have more operations in the U.S., while the mean of 0.16 of IFRS vs. US Operations for
24
The number of observations in the analysis is 170, not the 197 firms listed in the U.S. and previously reporting
with Canadian GAAP reported in Table 1, Panel B, because we exclude 27 firms. Specifically: five firms lost
foreign private issuer status and were required to adopt U.S. GAAP by the SEC, nine firms did not separately
disclose U.S. assets, three rate-regulated entities since their rate-regulated status perfectly explains their choice of
U.S. GAAP, and 10 firms did not disclose reconciliation to U.S. GAAP.
20
firms that choose IFRS indicates that firms that choose IFRS have more operations in IFRSbased countries.
Neither the mean nor the median of US Ownership are statistically significantly different,
contrary to our expectation. However, this is likely due to measurement error in our proxy since
institutional investors tend to invest in large companies. Multivariate testing that controls for
size is necessary to control for this weakness in our proxy.
The t-test of difference in means and the non-parametric Wilcoxon signed-rank test
indicate that more DSE firms choose IFRS than U.S. GAAP, consistent with lower accounting
complexity reducing the cost of IFRS adoption. The descriptive statistics indicate that firms
choosing U.S. GAAP are not statistically significantly different from firms that choose IFRS in
terms of Leverage, Size, or ROA.
Table 3 reports the pairwise correlations.
The Pearson and Spearman correlations
indicate that IFRS is positively and statistically significantly correlated with SE Comparability
and IFRS vs. US Operations, suggesting that the impact of reported results and comparability
with peer firms are important determinants of firms’ choice between the two standards. The high
and statistically significant Pearson (Spearman) correlation of 0.50 (0.57) between US
Ownership and Size highlights the measurement error in US Ownership caused by institutional
investors preference for investing in large stocks and confirms the need to control for size when
using our proxy.
Table 4 reports coefficients, z-statistics, and marginal effects for the probit regression
analysis of firms’ standard choice.
We calculate the marginal effect of each independent
variable as π(X) = Φ(x'β), where Φ is the cumulative distribution function of the standard normal
distribution and x’ and β are the vector of independent variables and corresponding coefficient
21
estimates from equation 1. We use the values zero and one for indicator variables and the first
and third quartiles for continuous X variables, with the remaining X variables set equal to their
mean values. We then compute the difference in π(X) at these two values of each X variable.
Our proxies for the impact of the standard choice on reported results indicate that this is a
significant determinant in firms’ decisions.
SE Comparability is positive and statistically
significant at the five percent level. The marginal effect indicates that as Canadian GAAP
portrays the net assets of the firm in a more favorable light than US GAAP, firms are 2.1 percent
more likely to adopt IFRS when moving from the first quartile to the third quartile SE
Comparability. In contrast, when U.S. GAAP portrays the net assets of the firm in a more
favorable light than Canadian GAAP, firms are more likely to adopt U.S. GAAP.25 R&D
Intensity is positive and significant, suggesting that firms with higher research and development
activities prefer the capitalization approach under IFRS to U.S. GAAP. The marginal effect is
low at 0.0 percent; but, as mentioned previously, only 18 percent of firms have R&D expense,
which means both the first and third quartile of R&D Intensity is zero.
The results for IFRS vs. US Operations are consistent with comparability being an
important determinant in firms’ decisions between the two standards.
The positive and
significant coefficient on IFRS vs. US Operations indicates that firms with more operations in
IFRS countries than in the U.S. are more likely to choose IFRS; firms with more operations in
the U.S. than outside the U.S. are more likely to choose U.S. GAAP. The marginal effect
25
We acknowledge that just because Canadian GAAP reports higher net assets than US GAAP does not mean that
IFRS will result in higher reported net assets than US GAAP. For the firms that adopt IFRS, we are able to provide
evidence consistent with our hypothesis. As noted in footnote 17, for all but 10 firms that chose IFRS we have the
reported stockholders’ equity under IFRS and U.S. GAAP for the year prior to IFRS adoption. Sixty-two percent of
the time IFRS is higher than U.S. GAAP and the mean and median stockholders’ equity are statistically significantly
higher under IFRS than U.S. GAAP.
22
indicates that firms at the third quartile of IFRS vs. US Operations are 6.2 percent more likely to
adopt IFRS than firms at the first quartile of IFRS vs. US Operations.
The results indicate that investor needs are a determinant in firms’ decisions in the choice
between IFRS and U.S. GAAP. Firms with higher ownership by U.S. investors are more likely
to choose U.S. GAAP than IFRS as evidenced by the negative and significant coefficient on US
Ownership. Firms at the third quartile of US Ownership are 4.0 percent less likely to adopt IFRS
than firms at the first quartile.
The results for Leverage and DSE provide some evidence about the role of costs in firms’
decisions between IFRS and U.S. GAAP.
The coefficient on Leverage is not statistically
significant. However, the positive and significant coefficient on DSE is positive and significant is
consistent with lower IFRS adoption costs for DSEs relative to non-DSEs due to less complex
accounting. DSEs are 6.4 percent more likely to adopt IFRS than non-DSEs.
Size is significantly, positively correlated with the likelihood that firms adopt IFRS. The
marginal effect is economically significant at 12.4 percent. This is consistent with a fixed cost
component to IFRS adoption that makes adoption relatively less costly for larger firms.
Performance as measured by ROA is not statistically significantly associated with firms’ standard
choice.
5. Liquidity effects of IFRS adoption in Canada
We extend our analysis of the capital-market effects of IFRS adoption in Canada by
examining whether its adoption resulted in changes in the liquidity of Canada’s capital markets.
Consistent with research examining IFRS adoption in other countries (Daske et al. (2008);
Christensen et al. 2011), we focus on liquidity as a proxy for economic outcomes because theory
23
predicts higher transparency reduces information asymmetries which in turn increases liquidity
(Glosten and Milgrom 1985; Diamond and Verrecchia 1991; Verrecchia 2001). Whether IFRS
provides better information to investors is an empirical question. On the one hand, IFRS
augments Canadian firms’ disclosures and may better convey the performance and resources of
the firm. On the other hand, Canadian GAAP is already a high quality accounting standard that
is quite similar to U.S. GAAP. Research comparing U.S. GAAP and IFRS (Gordon et al. 2011)
suggests that U.S. GAAP and IFRS are similar in quality. In this case, the adoption of IFRS is
unlikely to reduce information asymmetry amongst investors.
Data and research design
We obtain all data from Compustat, except for closing bid and ask prices, which we
obtain from Datastream. We examine the effects of IFRS adoption for the firms listed in the
U.S. and not listed in the U.S. separately.
For both analyses, we employ a difference-in-
differences design that benchmarks against U.S. firms to help control for contemporaneous
liquidity effects that are unrelated to IFRS adoption in Canada. The research designs for firms
listed in the U.S. and not listed in the U.S. differ slightly. For the former, we employ a matchedpair research design and for the latter we benchmark against all available U.S. firms. The reason
for the difference is that the sample of firms listed in the U.S. is relatively small and matching
likely better controls for size and industry effects than benchmarking against the U.S. population
firms. Additionally, some Canadian firms switched from Canadian GAAP to U.S. GAAP after
2006 when Canada announced the adoption of IFRS, but before 2011. Using a matched-pair
research design allows us to avoid including the period of the financial crisis for all firms in our
sample period (only firms that adopt U.S. GAAP during this time period include data affected by
the financial crisis). For the firms not listed in the US, the benefit of benchmarking against all
24
U.S. firms is that we are able to use more Canadian firms. This approach is not confounded by
the financial crisis since these firms adopted IFRS during 2011.26 Lastly, we focus our tests on
firms that were previously reporting under Canadian GAAP since firms’ that were already
reporting under U.S. GAAP (and all but 3 continue to use U.S. GAAP) are unlikely to experience
a change in liquidity around Canada’s adoption of IFRS.
For the firms listed in the U.S., we measure liquidity six months after IFRS adoption
starting the first fiscal quarter after a firm reports under IFRS, and for the same six-month period
one year earlier to ensure that the results are not affected by seasonal differences. This approach
omits any unusual and temporary liquidity effects during the initial adoption period.
The specifics of the matched-pair research design are as follows. We match Canadian
firms to U.S. firms, without replacement, based on industry (two-digit SIC) and size (market
value of equity) one year prior to adoption. Prior research documents variation in liquidity
across industries (Welker 1995). The industry composition of firms in Canada (i.e., a high
concentration in mining) differs from the U.S. and matching on industry mitigates the effect of
industry differences on our inferences. Matching on size controls the effects of size of stock
issues and the information environment on liquidity (Glosten and Milgrom 1985; Amihud 2002).
Liquidity for the matched-pairs of U.S. firms is measured for the same overlapping six-month
periods used for the sample firms.27 We estimate the following regression that controls for firm
characteristics associated with liquidity as well as industry effects:
26
Using the matched-pair research design for the firms not listed in the U.S. reduces the sample of Canadian firms
from 847 to 391. This is due both to lack of U.S. matches due to industry concentration and requiring six months of
liquidity data. We note, however, that the matched-pair research design yields similar results as the approach
presented.
27
We find similar results if we measure liquidity for 12 months.
25
Liquidityt = β0 + β1IFRSt + β2Postt + β3IFRSt*Postt + β4USGAAPt+ β5USGAAPt*Postt
+ β6Major Exchanget + β7Ln(Market Valuet-1) + β8Ln(Volatilityt-1)
+ β9Ln(Share Turnovert-1) + εt
(2)
We employ three commonly used proxies for liquidity. The first proxy is Share Turnover
defined as the median of the daily turnover during the six-month period where daily turnover is
calculated as daily share volume divided by the shares outstanding. The second proxy is Zero
Returns defined as the proportion of trading days with zero returns out of all potential trading
days in the six-month period. The third proxy for liquidity is Bid-Ask Spread defined as the
median of the daily bid-ask spread during the six-month period where the bid-ask spread is
calculated as the difference between the closing bid and ask price divided by the mid-point.
IFRS is a binary variable equal to one if a firm adopts IFRS (i.e., all sample firms), and zero
otherwise. US GAAP is a binary variable equal to one for Canadian firms that adopt U.S. GAAP,
and zero otherwise. Post is a binary variable equal to one in the period after IFRS adoption, and
zero otherwise. The other variables are control variables for firm characteristics associated with
liquidity. Major Exchange is a binary variable equal to one if the firm is traded on the Toronto
Stock Exchange, New York Exchange, American Stock Exchange, NASDAQ, and zero
otherwise (i.e., the Over-the-Counter Bulletin Board or TSX Venture Exchange). Market Value
is the stock price times the number of shares outstanding at the end of the period. Volatility is
the standard deviation of daily stock returns during the six-month period.
All continuous
variables are winsorized at the extreme percentiles and if indicated, we use the natural logarithm
of the raw values.
For the firms not listed in the US, our identification strategy is similar to Christensen et
al. (2011) where we benchmark against U.S. firms, exploit differences in the timing of IFRS
26
adoption and use a comprehensive fixed effects structure. Specifically, we use U.S. firms as a
benchmark to control for any macro shocks and trends in liquidity. We exploit the differences in
timing of Canadian firms’ adoption of IFRS arising from different fiscal year ends. This helps us
control for within-country liquidity changes in Canada that are unrelated to IFRS adoption.
Lastly, we use a comprehensive fixed effects structure that includes industry, country, and
separate monthly fixed effects for Canada and the United States. The time period included in the
analysis is from January 1, 2010 to June 30, 2012. This results in a roughly equal amount of
time in the periods before and after IFRS adoption. The model examining firms not listed in the
U.S. is as follows:
Liquidityt = β0 + β1IFRSt + β2Major Exchanget + β3Ln(Market Valuet-1)
+ β4Ln(Volatilityt-1) + β5Ln(Share Turnovert-1)
+ ΣβiFixed Effects + εt
(3)
All variables are defined as before, except that IFRS is a binary variable that takes on the value
of ‘1’ beginning in the month a company files its first interim filing under IFRS. Liquidity is
measured monthly to better identify the precise timing of IFRS adoption.
All continuous
variables are winsorized at the extreme percentiles and if indicated, we use the natural logarithm
of the raw values.
Empirical results
Table 5 presents the sample formation and descriptive statistics for firms used in the
liquidity analysis. Panel A details that the sample selection criteria result in 92 firms listed in the
U.S. that have liquidity data and a US-matched pair and 843 firms not listed in the U.S. that have
liquidity data.28 Table 5, Panel B provides descriptive statistics for the period prior to IFRS or
28
Matching on industry is a binding constraint. When we relax the one-to-one matching constraint, we get a U.S.match for all 140 firms that have liquidity data. We find qualitatively similar results using this sample.
27
U.S. GAAP adoption for the firms listed in the U.S. and their US-matched pairs. In general,
liquidity is statistically significantly higher for the US-matched pairs. One exception is that the
mean of the Bid-Ask Spread is higher for the US-matched pairs. The proportion of firms on a
major exchange is approximately the same for Canadian firms and their US-matched pairs. The
sample and benchmark firms are of similar size, which is expected since the firms were matched
on this dimension. The US-matched pairs have a lower volatility of daily stock returns.
Table 5, Panel C presents descriptive statistics for the firms not listed in the United
States. The U.S. firms have higher liquidity as measured by Share Turnover, Zero Returns, and
Bid-Ask Spreads. A higher percentage of U.S. firms are on a major exchange and U.S. firms are
larger with more volatile stock returns. Table 5, Panel D details the industry distribution for
firms not listed in the U.S. and their benchmark U.S. firms (see Table 2 for the industry
distribution of firms listed in the US). The key differences in industry concentration between
Canada and the U.S. are the high concentration of mining firms in Canada and the high
concentration of manufacturing firms in the US.
Table 6 presents the regression analysis of the liquidity effects of adopting IFRS or U.S.
GAAP for Canadian firms that are listed in the United States. The control variables are generally
statistically significant in the expected direction. The significant coefficients on IFRS and
USGAAP in the Bid-Ask Spread model (and Zero Returns model for IFRS) suggest that the U.S.
listed Canadian firms have less liquidity than their matched-pairs. The insignificant coefficients
on IFRS*POST and USGAAP*Post imply no statistically significant change in liquidity for
Canadian firms adopting IFRS or U.S. GAAP relative to their US-matched pairs.
Table 7 documents some evidence of a change in liquidity after adopting IFRS for
Canadian firms not listed in the US. Specifically, the coefficients on IFRS are consistent with a
28
decrease in liquidity after IFRS adoption for two proxies, Share Turnover and Bid-Ask Spread.
The coefficient is negative and significant on IFRS in the Share Turnover regression, and is
modestly significant at the 10 percent level. The coefficient on IFRS is positive and significant
in the Bid-Ask Spread regression, which is consistent with an increase in information asymmetry
after Canadian firms adopt IFRS. The regressions using Zero Returns as the proxy for liquidity
yields a statistically insignificant coefficient estimate for IFRS adoption. The control variables
are statistically significant in the expected direction in all three regressions.
Sensitivity tests
Our previous analysis marks IFRS adoption in the month of the quarter that a firm files
its first interim IFRS financial statements. However, annual IFRS filings include much more
information than interim disclosures. Therefore, the full effects of IFRS adoption may not
materialize until the annual financial statements are filed. Our previous analysis also assumes
that the effects of IFRS adoption for large and small firms are the same. Understanding the
effects of IFRS adoption for the large firms in Canada is likely of interest to U.S. regulators since
U.S. firms tend to be much larger than Canadian firms. We address both of these issues as
follows.
We examine the liquidity effects of annual IFRS filings for firms not listed in the U.S. by
creating an indicator variable IFRSquarter that is equal to ‘1’ beginning in the month a firm files its
first interim filing under IFRS until the last month before it files its first annual filing under
IFRS, and zero otherwise. To test the impact of annual IFRS filings, we create an indicator
variable IFRSannual that is equal to ‘1’ in the month a firm files its first interim filing under IFRS,
and zero otherwise. Untabulated results reveal similar results to the main analysis for Zero
Returns and Bid-Ask Spreads.
The coefficient estimates for IFRSquarter and IFRSannual are
29
statistically insignificant in the Zero Returns regression while both coefficient estimates are
positive and significant in the Bid-Ask Spreads regression, consistent with main results. The
results for Share Turnover are not consistent with the main results. In the Share Turnover
regression the coefficient estimate for IFRSquarter is negative and statistically significant while the
coefficient estimate for IFRSannual is statistically insignificant. This suggests the change in share
turnover is a temporary effect.
We address whether the size of the firms adopting IFRS affects the liquidity
consequences of IFRS adoption by partitioning firms into large and small firms based on the
median size of Canadian firms at December 31, 2010.
Untabulated results show that the
coefficient on IFRS is not statistically significant in any of the three regressions for the large
firms. This result is likely of interest to U.S. regulators since these firms are most similar to U.S.
firms in terms of size. In contrast, the coefficient on IFRS is positive and significant in the BidAsk Spreads regression, but not statistically significant in the two regressions using Share
Turnover and Zero Returns as the liquidity proxies. This result indicates that the increase in bidask spreads after IFRS adoption appears to be concentrated amongst small firms. Anecdotal
evidence suggests the quality of IFRS implementation may have been lower amongst smaller
firms (Schaefer 2012). This may be due to fewer resources to devote towards IFRS adoption or
reporting incentives.
We examine the results for annual IFRS filings for large and small firms. The results of
this untabulated analysis indicate that large firms exhibit no statistically significant association
between IFRS adoption for the interim filings for any of the three measures of liquidity.
However, for small firms the coefficients on IFRSquarter and IFRSannual are both positive and
30
significant in the Bid-Ask Spreads regression, but not statistically significant in the two
regressions using Share Turnover and Zero Returns as the liquidity proxies.
Overall, these sensitivity tests suggest that the liquidity effects of IFRS adoption in
Canada are limited. The only consistent association is that IFRS adoption appears to have
increased the bid-ask spread for smaller firms that adopt IFRS in Canada.
6. Conclusion
This paper is motivated by the U.S. SEC’s current deliberations over whether U.S. firms
should be required or permitted to report under IFRS. Due to similarities in accounting standards
(Canadian and U.S. GAAP) and in financial reporting incentives and enforcement between
Canada and the U.S., the recent mandate in Canada that publicly-traded Canadian firms switch to
IFRS should be of particular interest to U.S. standard setters. Moreover, Canadian firms were de
facto permitted to report under either IFRS or U.S. GAAP. Effectively, Canada is permitting a
choice between standards similar to one proposal being considered by the U.S. SEC. Our study
of the determinants of Canadian firms’ choice between accounting standards, IFRS or U.S.
GAAP, should therefore be of immediate interest to the U.S. SEC. Our results suggest that the
impact of accounting standards on reported results, the size, the R&D intensity, the amount of
non-U.S. foreign operations, the amount of foreign ownership and the accounting complexity
associated with switching all are important determinants of firms’ choice between IFRS and U.S.
GAAP. Curiously, more Canadian firms report under U.S. GAAP as an unintended consequence
of Canada adopting IFRS.
Our liquidity analyses suggest limited effects from IFRS adoption except for increased
bid-ask spreads for smaller Canadian firms. We examine liquidity because it is commonly
31
viewed as a comprehensive measure of a firm’s information environment, both in terms of level
of information and information asymmetry among investors. If a change in accounting
standards, such as IFRS adoption, leads to a change in firms’ information environment, firms
may respond by changing their voluntary disclosure policies, including conference calls and
management forecasts. Thus, it is possible to observe no change in bid-ask spreads, even though
IFRS adoption per se did decreased the information from the financial statements because firms
responded with voluntarily increasing other disclosures. In fact, Canadian Bonterra Energy
stated that this was their intent.29 In addition to firms adjusting their strategies for voluntary
disclosures and information dissemination, other intermediaries and market participants, such as
analysts and investors, may change their strategies for information collection and processing
(see, among others, Ball et al. 2012). This line of reasoning would suggest that future research
might examine changes in earnings quality and voluntary disclosures around IFRS adoption.
29
Specifically, Bonterra Energy stated in its Q1 2011 interim report that:
“It is mandatory that all Canadian publically accountable enterprises prepare their financial statements in accordance
with Canadian Generally Accepted Accounting Principles (Canadian GAAP) revised to incorporate new accounting
standards under IFRS. This change in accounting principles significantly affected certain financial information and
disclosures from past financial reporting of the Company and may be confusing to Bonterra’s shareholders.
Reporting under IFRS will result in Canadian standards now being more aligned with European and Australian
accounting standards and away from previous Canadian principles and present United States principles. IFRS
permits companies to be flexible with their reporting and this may result in making it more difficult to compare
Canadian companies with each other, or in some instances, cross border reporting Canadian companies with their
U.S. peers.
IFRS has been and continues to be a very costly and time consuming transition for Canadian companies
and will likely continue to be so into the future. Management is of the opinion that the adoption of IFRS should have
been delayed for Canadian companies and for the respective industries that are affected at least until the United
States decided what form of IFRS it would adopt, if any. Regulators and the accounting profession obviously did not
agree.
Bonterra will ensure that appropriate disclosures and discussions are provided in the MD&A and the
financial statements to assist shareholders, analysts and other parties with their respective evaluations and has
provided additional information in the above “Highlights” section to assists readers with their reviews.”
32
Appendix: Event study of IFRS adoption in Canada
Canadian IFRS adoption process
The stock market’s reaction to the events associated with IFRS adoption in Canada is
likely of interest to Canadian and U.S. regulators. Similar to Armstrong et al. (2010), we identify
the key events associated with IFRS adoption in Canada (see Table 1A for a summary of these
eight events). Although IFRS adoption has not yet materialized, Joos and Leung (2013) perform
a similar analysis on 15 key events relating to IFRS adoption in the U.S. and find more (less)
positive responses in cases where IFRS is expected to lead to convergence benefits (costs). We
believe studying the IFRS adoption process in Canada is informative to Canadian standard
setters.
The process to adopt IFRS in Canada formally started in 2004.30 Prior to 2004, the
Canadian Accounting Standards Board (AcSB) was implementing a dual strategy of harmonizing
with U.S. GAAP and working towards convergence with international accounting standards. The
ultimate goal was that there would be one set of internationally accepted standards. On May 31,
2004, the AcSB reconsidered its existing strategy and sought input from constituents on whether
Canada should (1) keep Canadian GAAP, (2) abandon Canadian GAAP and adopt IFRS, (3)
abandon Canadian GAAP and adopt U.S. GAAP, or (4) permit firms to choose between IFRS or
U.S. GAAP. Constituents advocated for all four positions. Proponents of maintaining Canadian
GAAP argued that the costs involved in switching to either IFRS or U.S. GAAP outweighed the
benefits. They felt that Canadian GAAP better represented the economics of Canadian firms and
saw no need to abandon Canadian GAAP in the near term. Proponents of adopting U.S. GAAP
argued that this was the natural choice since so many companies already reported under U.S.
30
For a detailed discussion of Canada’s decision to adopt IFRS, please see the AcSB’s 2011 report, “Adoption of
International Financial Reporting Standards: Background and Basis for Conclusions.”
33
GAAP for primary or secondary reporting purposes. They further argued that U.S. GAAP was a
high quality standard and that separate Canadian and U.S. GAAPs led to poor comparability
within industry peer groups and within a single North American market. The majority of
respondents were in favor of adopting IFRS. They emphasized that capital markets had become
truly international, a trend they believed would only accelerate in the future, and that it was in
the best long-term interest of Canada to adopt IFRS. The AcSB also noted the global focus of
IFRS and knew they could be involved in the due process as the standards continued to evolve.
In contrast, U.S. GAAP was focused only on serving the needs of the U.S. capital markets and
that neither the SEC nor FASB were going to be responsive to their needs or concerns. Not all
constituents favored choosing only one standard.
Some, such as PricewaterhouseCoopers,
advocated permitting firms to choose between IFRS or U.S. GAAP.
After considering their constituent’s input, on February 10, 2005, the AcSB proposed
adopting IFRS in full to its oversight body, the Accounting Standards Oversight Council, while
allowing entities that wanted to use U.S. GAAP to do so. On March 31, 2005, the AcSB sought
comment on its proposal to adopt IFRS. On April 15, 2005, the SEC introduced a possible road
map to eliminate the reconciliation requirement for IFRS. This event had an impact on many
constituents. For example, Ernst & Young expressed a preference for U.S. GAAP in its response
to the AcSB’s May 31, 2004 invitation to comment. On August 5, 2005, nearly a year later,
Ernst & Young changed its mind and expressed a preference for IFRS. It cited the SEC’s
elimination of the reconciliation requirement as a primary reason for this switch.
On September 7, 2005, the AcSB tentatively decided to continue with its plan to adopt
IFRS. Then on January 10, 2006, the AcSB ratified its plan to adopt IFRS over a five-year
transition period, while allowing SEC registrants to continue reporting with U.S. GAAP. On
34
November 15, 2007, the SEC voted to eliminate the reconciliation requirement for foreign
private issuers reporting under IFRS. The final event in Canada’s IFRS adoption was the
AcSB’s confirmation of the IFRS changeover with the announcement that Canadian publicly
accountable enterprises would be required to adopt IFRS for fiscal years beginning on or after
January 1, 2011.
Data and research design
We examine the market reaction to our eight adoption events related to IFRS adoption in
Canada. Our approach is similar to Armstrong et al. (2010), where we first focus on the overall
Canadian market reaction to these events. We then perform tests that examine whether certain
firm characteristics explain cross-sectional variation in firms’ stock price reactions to these
events.
Our main sample for this study consists of Canadian firms with event returns for all eight
events.31 We exclude firms reporting under U.S. GAAP. This results in a sample of 653 firms
for both our overall market reaction study and cross-sectional tests. We obtain daily price data
from Compustat’s Security Daily file. We base our overall market reaction tests on three-day
value-weighted market-adjusted returns for these firms centered on each of the eight event dates.
We construct portfolio event returns by weighting each firm’s return based on the firm’s equity
market value at the end of the most recent quarter prior to the event date. This results in a valueweighted portfolio, CMARe, for each event.
We market-adjusted raw event returns to control for confounding effects of
macroeconomic news that occur on our event dates (e.g., Campbell, Lo and MacKinlay 1997).32
Because our events affect all Canadian firms, we use a non-Canadian market return to control for
31
We draw similar inferences if we relax this constraint and require sample firms to only have returns for one event,
which yields 1,690 firms.
32
We obtain similar results if we do not market-adjust our portfolio returns.
35
other macroeconomic news. Since the U.S. is the most similar capital market to Canada (SEC
2011), we use the U.S. market return to market-adjust our raw Canadian returns, which we
obtain from CRSP. Untabulated statistics indicate a positive and significant Pearson correlation
of 0.68 between daily non-event returns for our Canadian market portfolio and the U.S. market,
which suggests the U.S. market is a useful benchmark to control for macroeconomic news.33
Our cross-sectional tests focus on firm characteristics that are likely to explain different
stock price reactions to our eight events. An important difference between our study and
Armstrong et al. (2010) is that Canadian GAAP is a high quality accounting standard, whereas,
many of the domestic standards in the countries Armstrong et al. study were lower in quality.
Webster and Thornton (2005) find no overall difference in accrual quality between Canadian
firms reporting under Canadian GAAP and U.S. firms reporting under U.S. GAAP. A primary
focus in Armstrong et al. (2010) is examining whether firms with larger changes in information
asymmetry experience a more positive stock price reaction to IFRS adoption events in Europe. It
is not clear that adoption of IFRS in Canada will result in a significant reduction in information
asymmetry.
Nonetheless, IFRS adoption by Canadian firms does change the accounting
numbers they report. Further, the adoption of IFRS involves an increase in note disclosure for
most firms in Canada (BDO Canadian GAAP IFRS Comparison Series).
As in our overall market reaction study, our cross-sectional analysis assumes that
investors evaluate the expected costs and benefits of IFRS adoption, which likely vary across
firms. We estimate a similar model to Armstrong et al. (2010) to consider whether firm-specific
characteristics explain the market reaction to the events leading to adoption of IFRS in Canada:
CMARj,e = β0 + β1Sizej,e + β2US Listedj,e + β3Turnoverj,e + β4Herfj,e + β5Big4j,e
33
As a reference point, Armstrong et al. (2010) document a 0.551 Pearson correlation between their sample
portfolio returns and benchmark portfolio.
36
+ β6Codej,e + εj,e
(4)
where j is the firm and e is the event. We estimate the model using OLS and robust standard
errors clustered on two-digit industry (Rogers 1993, Petersen 2009).
Firms operating in a rich information environment are likely to benefit less from any
increased transparency associated with transitioning to IFRS. We include Size, the log of the
firm’s prior end of year market value of equity, as a measure of a firm’s information
environment (e.g., Lang and Lundholm 1993). If there is less of a change in the information
environment for larger firms, we expect a negative sign on β1. As an additional proxy for a
firm’s information environment, we include an indicator variable for whether a firm is listed in
the U.S. US Listed is equal to 1 if the firm is listed in the U.S., and 0 otherwise. We expect
negative sign on β2.
We include two proxies for information asymmetry between the firm and investors. The
first is Turnover, an indicator variable equal to 1 if the firm’s mean daily percentage shares
traded during the year is above the median and 0 otherwise. The other proxy is Herf, which is
the Herfindahl Index, measured as the sum of squared market shares for all firms in the firm’s
primary two-digit SIC code. Herf ranges from 0 to 1 with higher values representing less
industry competition. Firms with lower turnover and lower industry competition are likely to
have more information asymmetry.
If investors believe IFRS will reduce information
asymmetry for Canadian firms, then they will react more favorably to increases in the probability
of IFRS adoption.
We include Big4, an indicator variable equal to 1 if the firm’s auditor is Deloitte,
PricewaterhouseCoopers, KPMG, or Ernst & Young, and 0 otherwise, to proxy for enforcement
and implementation of accounting standards. Prior research finds that Big 4 auditors provide
37
higher quality audits (e.g., Becker et al. 1998, Francis and Wang 2008). The Big 4 firms also
have significant experience and resources associated with the adoption of IFRS. Thus, investors
may believe that firms with Big 4 auditors will better implement IFRS.
Finally, Canada is predominantly a common law country. However, the province of
Quebec has a civil law legal origin. Cross-country studies examining earnings quality and legal
origin generally find that earnings quality is higher in common law countries (e.g., Ball et al.
2000). However, Burnett, Jorgensen and Merrill (2011) provide evidence that for some earning
attributes Quebec firms have higher earnings quality than non-Quebec firms, contrary to findings
from the cross-country literature. Armstrong et al. (2010) find lower stock price reactions to
IFRS adoption events in Europe for firms located in civil law countries, consistent with weaker
enforcement. A negative coefficient on Code is consistent with weaker enforcement. Given the
findings of Burnett et al. (2011), however, a negative coefficient may also indicate less of a
change in earnings quality from IFRS for companies located in Quebec than the rest of Canada.
Thus, we expect a negative coefficient for Code, an indicator variable equal to 1 if the firm is
domiciled in Quebec, and 0 otherwise.
Empirical results for event study of IFRS adoption in Canada
Table 2A provides results for the Overall Canadian Market Reaction to our eight events.
If IFRS is viewed as beneficial by investors, then we expect a positive market return for all
events except May 31, 2004, which we do not have a prediction for since it is not clear at that
point that the AcSB will adopt IFRS. The raw return for Canada is positive for six out of the
eight events. The market-adjusted returns are positive for five out of the eight events. Further,
the mean return across the eight events is 0.0036 and 0.0034 for the raw and market-adjusted
38
returns, respectively. Together these results are consistent with investors viewing the benefits of
IFRS as greater than the costs in Canada.
To test the statistical significance of the market response, we follow Armstrong et al.
(2010) and focus on the mean return across events since IFRS adoption was a culmination of
several events in Canada. We also employ the three statistical tests used by Armstrong et al.
(2010): (1) a t-test of whether the mean return across the events is significantly different from
zero, (2) a t-test of whether the mean return across the events is significantly different from the
278 three-day non-event window returns from January 1, 2004 through June 30, 2008,34 and (3) a
boot-strap based test where the standardized mean return across the events is compared to the
standardized mean return of eight randomly selected non-event three-day windows, which is
repeated 500 times, and the p-value is calculated as the percentage of times the mean return for
the eight randomly selected non-events is greater than the mean return for the eight events. The
mean market-adjusted return across events is 0.0034. However, all three test statistics indicate
that the mean return is not statistically significant (t-statisticvs.0 is 1.13, t-statisticvs.278 is 0.85, and
p-valuebootstrap is 0.18). However, we note that this finding is sensitive to the use of a valueweighted portfolio. Untabulated results reveal that the market-adjusted mean return across
events for an equally-weighted portfolio is 0.0092 and is statistically significantly different from
zero (p-value of 0.02). Further, the raw returns for Canada (market-adjusted returns) are positive
for six (seven) of the eight events. Since the significance of the overall market reaction is
sensitive to the choice of a value-weighted versus equally-weighted portfolio, we turn to our
cross-sectional analysis to provide additional evidence on the stock price reaction to the events
leading to IFRS adoption in Canada.
34
Following Armstrong et al. (2010), we begin three-day non-event windows on every fourth day. Our results are
not sensitive to the beginning date.
39
Table 3A, Panel A, presents descriptive statistics for firms used in the cross-sectional
analysis. We observe that the mean (median) of the cumulative market-adjusted return (CMAR)
is positive. About 29% of the sample is cross-listed in the U.S. Table 3A, Panel B, shows that
mining firms are most prevalent in the sample followed by manufacturers.
Table 4A presents the regression results for our cross-sectional analysis. The coefficient
on the variable, Size, is statistically significant and negative.
As expected, larger firms
experience a lower stock price reaction to the events associated with IFRS adoption. This result
is consistent with a larger increase in perceived benefits for smaller firms from the adoption of
IFRS. The coefficient on Code is also statistically significant and negative which may be
consistent with weaker enforcement of IFRS or less of an expected change in earnings quality
from IFRS in Quebec than the rest of Canada. The rest of our variables are the predicted sign,
but statistically insignificant.
Overall, our event study results suggest some evidence of a favorable response to an
increased likelihood of IFRS adoption in Canada. A priori, our event studies might differ from
Armstrong et al. (2010) because unlike European firms, Canadian firms had the choice between
two accounting standards, IFRS and U.S. GAAP.35 Further, our results might a priori differ from
Joos and Leung (2013) because Canadian adoption of IFRS did occur. Our cross-sectional
analyses indicate that the market reaction is lower for large firms and those located in Quebec.
These results should be of interest to regulators, standard setters, and listed companies in both
Canada and U.S.
35
Arguably, all Canadian firms have the option to list securities in the US and adopt IFRS.
40
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TABLE 1
Sample
Panel A: Sample Selection
Canadian firms in Compustat
Defer adoption of IFRS
Firms that must adopt US GAAP or IFRS
1,445
(135)
1,310
Of the firms that must adopt US GAAP or IFRS:
IFRS
US GAAP
1,218
92
1,310
Panel B: Adoption of IFRS or US GAAP Conditional on US-Listing Status and Previous Accounting
Standard
Accounting Standard Adopted
Listed in US one year
prior to accounting Accounting Standard
standard choice?
Prior to 2006*
IFRS
US GAAP
Total
US GAAP
3
45
48
Yes
Canadian GAAP
163
34
197
Subtotal
166
79
245
No
US GAAP
Canadian GAAP
Subtotal
Total
0
1,052
1,052
1,218
0
13
13
92
0
1,065
1,065
1,310
Notes:
The sample consists of Canadian firms in Compustat that were required to adopt either IFRS or US
GAAP. Insurance companies and investment companies are allowed to defer the adoption of IFRS
until fiscal years beginning on or after January 1, 2013. Panel B presents the accounting standard
adopted conditional on a firm's cross-listing status and previous accounting standard.
*If a firm's inception is in 2006 or later, the firm's first accounting standard is reported. Of the 13 firms
that were not listed in the US but chose US GAAP, eight became SEC registrants in order to report
with US GAAP while five were rate-regulated entities that obtained special permission to adopt US
GAAP until January 1, 2015 without becoming a SEC registrant.
45
TABLE 2
Descriptive Statistics for Firms Used in Standard Choice Analysis
Panel A: Descriptive Statistics
U.S. GAAP (N=23)
Variable
Mean
Median
IFRS (N=147)
Mean
Median
SE Comparability
-0.12
0.00
0.27**
0.07***
R&D Intensity
0.07
0.00
0.04
0.00**
IFRS vs. US Operations
-0.25
-0.15
0.16***
0.00***
US Ownership
0.14
0.01
0.12
0.06
Leverage
0.19
0.17
0.15
0.05
DSE
0.22
0.00
0.37*
0.00*
Size
4.98
4.79
5.63
5.32
ROA
-0.21
-0.03
-0.22
-0.04
Panel B: Distribution of Accounting Standards by Industry
U.S. GAAP
IFRS
Industry (Two-Digit SIC Codes)
Frequency
Percentage
Frequency
Percentage
Mining (10-14)
7
30%
98
67%
Manufacturing (20-39)
9
39%
24
16%
Transportation and Utilities (40-49)
3
13%
4
3%
Services (70-89)
2
9%
7
5%
Other
2
9%
14
10%
Total
23
100%
147
100%
Notes:
The sample consists of 170 Canadian firms previously using Canadian GAAP and listed in the U.S. We
exclude 27 firms from Table 1 for the following reasons: five firms that adopted U.S. GAAP because
they lost Foreign Private Issuer status in the US and were required to begin using U.S. GAAP by the
SEC, nine firms that did not separately disclose assets in the US, three rate-regulated entities, and 10
firms did not disclose a reconciliation to U.S. GAAP. SE Comparability is the percentage difference
between the stockholders' equity under Canadian GAAP and U.S. GAAP calculated as Canadian
GAAP stockholders' equity less U.S. GAAP stockholders' equity scaled by the absolute value of
Canadian GAAP stockholders' equity. R&D Intensity is research and development expense divided by
total assets. IFRS vs. US Operations indicates whether a more of a firms' assets are located in IFRS
countries or the U.S. and is calculated as assets in IFRS countries less assets in the U.S. scaled by total
assets. US Ownership is the percentage of common stock held by U.S. institutional investors.
Leverage is debt divided by total assets. DSE is equal to 1 if a firm is a Development Stage Enterprise,
and 0 otherwise. Size is the log of total assets. ROA is net income divided by total assets. "Other"
consists of Agriculture (01-09), Finance (60-67), and Wholesale Trade (50-51). *, **, *** denote
statistical significance at the 0.10, 0.05, and , 0.01 levels (one-tailed when predicted direction),
respectively, based on t-test for the difference in means and a nonparametric Wilcoxon signed-rank test
for the difference in medians.
46
TABLE 3
Correlations
IFRS
SE Comparability
R&D Intensity
IFRS vs. US Operations
US Ownership
Leverage
DSE
Size
ROA
Notes:
IFRS
1.00
0.18
-0.04
0.25
-0.04
-0.06
0.11
0.07
0.00
SE
R&D
Comparability Intensity
-0.17
0.22
1.00
-0.13
0.06
1.00
0.10
-0.04
-0.08
-0.19
-0.10
-0.05
-0.10
0.17
-0.17
-0.30
-0.14
-0.54
IFRS vs. US
US
Operations Ownership Leverage
0.01
-0.10
0.25
0.04
-0.19
-0.21
-0.02
-0.09
-0.16
1.00
0.12
0.00
1.00
0.13
0.28
0.10
0.08
1.00
0.02
-0.34
-0.13
-0.05
0.12
0.50
-0.04
0.12
-0.23
DSE
0.11
0.26
-0.25
0.04
-0.33
-0.41
1.00
-0.54
-0.24
Size
0.07
-0.14
-0.24
-0.07
0.57
0.50
-0.56
1.00
0.41
ROA
0.01
-0.18
-0.19
-0.09
0.36
0.31
-0.50
0.67
1.00
The table presents pairwise Pearson (Spearman) correlations below (above) the diagonal for the 170 Canadian firms used in the choice
analysis that were previously using Canadian GAAP and listed in the U.S. Bold indicates correlations statistically significant at the 10 percent
level or lower. IFRS is equal to 1 if a firm adopts IFRS, and 0 if a firm adopts U.S. GAAP. SE Comparability is the percentage difference
between the stockholders' equity under Canadian GAAP and U.S. GAAP calculated as Canadian GAAP stockholders' equity less U.S.
GAAP stockholders' equity scaled by the absolute value of Canadian GAAP stockholders' equity. R&D Intensity is research and
development expense divided by total assets. IFRS vs. US Operations indicates whether a more of a firms' assets are located in IFRS
countries or the U.S. and is calculated as assets in IFRS countries less assets in the U.S. scaled by total assets. US Ownership is the
percentage of common stock held by U.S. institutional investors. Leverage is debt divided by total assets. DSE is equal to 1 if a firm is a
Development Stage Enterprise, and 0 otherwise. Size is the log of total assets. ROA is net income divided by total assets.
47
TABLE 4
Probit Regression Analysis of Standard Choice
Variable
Expectation
Constant
SE Comparability
+
R&D Intensity
+
IFRS vs. US Operations
+
US Ownership
-
Leverage
+/-
DSE
+
Size
+/-
ROA
+/-
Industry Fixed Effects
No. of Observations
Coefficient
-0.37
(-0.67)
0.54**
(2.27)
2.20**
(1.74)
0.99***
(2.94)
-1.93**
(-1.64)
0.14
(0.36)
0.62*
(1.41)
0.29***
(3.62)
0.15
(0.51)
Marginal Effect
2.1%
0.0%
6.2%
-4.0%
0.3%
6.4%
12.4%
0.2%
Yes
170
2
McFadden R
31.8%
Wald χ2
41.75
Notes:
The sample consists of 170 Canadian firms used in the choice analysis that were previously using
Canadian GAAP and listed in the U.S. SE Comparability is the percentage difference between the
stockholders' equity under Canadian GAAP and U.S. GAAP calculated as Canadian GAAP
stockholders' equity less U.S. GAAP stockholders' equity scaled by the absolute value of Canadian
GAAP stockholders' equity. R&D Intensity is research and development expense divided by total
assets. IFRS vs. US Operations indicates whether a more of a firms' assets are located in IFRS
countries or the U.S. and is calculated as assets in IFRS countries less assets in the U.S. scaled by total
assets. US Ownership is the percentage of common stock held by U.S. institutional investors.
Leverage is debt divided by total assets. DSE is equal to 1 if a firm is a Development Stage Enterprise,
and 0 otherwise. Size is the log of total assets. ROA is net income divided by total assets. We calculate
the marginal effect of each independent variable as π(X ) = Φ(x' β) using the values 0 and 1 for indicator
variables and the first and third quartiles for continuous X variables, with the remaining X variables set
equal to their mean values. We then compute the difference in π(X ) at these two values of each X
variable. *, **, *** denote statistical significance at the 0.10, 0.05, and 0.01 levels (one-tailed when
predicted direction), respectively, based on robust standard errors. z-statistics in parentheses.
48
TABLE 5
Sample Formation and Descriptive Statistics for Firms Used in Liquidity Analysis
Panel A: Sample Formation
Canadian firms previously using CA GAAP
Less: Firms that list in US or obtain special approval
to adopt US GAAP
Firms without sufficient data
Firms without matched-pairs
Canadian firms used in liquidity analyses
Panel B: Descriptive Statistics for Firms Listed in US
Canadian Firms
Variable
Mean
Median
Share Turnover
0.0039
0.0023
Zero Returns
0.1479
0.0476
Bid-Ask Spread
0.0673
0.0221
Major Exchange
0.74
1.00
Ln(Market Value t-1 )
20.36
20.29
Ln(Volatility t-1 )
-3.43
-3.46
Panel C: Descriptive Statistics for Firms Not Listed in US
Canadian Firms
Variable
Mean
Median
Share Turnover
0.0020
0.0009
Zero Returns
0.2084
0.1304
Bid-Ask Spread
0.0576
0.0258
Major Exchange
0.75
1.00
Ln(Market Value t-12 )
18.75
18.57
Ln(Volatility t-12 )
-3.42
-3.38
Listed in US
197
0
(57)
(48)
92
Not Listed in
US
1,052
(13)
(196)
0
843
US Matched-Pairs
Mean
Median
0.0073***
0.0044***
0.0783***
0.0000***
0.1633***
0.0018***
0.79**
1.00**
20.07
19.62
-3.30
-3.47**
US Firms
Mean
Median
0.0066***
0.0046***
0.0623***
0.0000***
0.0217***
0.0015***
0.95***
1.00***
19.83***
19.80***
-3.57***
-3.59***
(This table is continued on next page.)
49
TABLE 5 (Continued)
Panel D: Industry Distribution for Firms Not Listed in US
Canadian Firms
US Firms
Industry (Two-Digit SIC Codes)
Frequency
Percentage
Frequency
Percentage
Mining (10-14)
390
46%
147
4%
Manufacturing (20-39)
163
19%
1,369
40%
Finance, Insurance, and Real Estate
(60-67)
72
9%
744
22%
Services (70-89)
59
7%
509
15%
Transportation and Utilities (40-49)
50
6%
284
8%
Retail Trade (52-59)
30
4%
197
6%
Other
79
9%
209
6%
Total
843
100%
3,459
100%
Notes:
The table presents the sample formation and descriptive statistics for firms used in the liquidity analysis.
US firms are used as benchmark firms. We require that US firms have a minimum of six months of data
before and after March 31, 2011 (the first quarter end for which Canadian firms were required to
adopt IFRS). For the firms listed in the US, descriptive statistics are presented for the period prior to
adoption of IFRS and liquidity measures are calculated for a 12 month period. For the firms not listed
in the US, descriptive statistics are presented for all monthly data used in the liquidity analysis. Share
Turnover is the median of the daily turnover during each period where daily turnover is calculated as
daily share volume divided by the shares outstanding. Zero Returns is the proportion of trading days
with zero returns out of all potential trading days in each period. Bid-Ask Spread is the median of the
bid-ask spread for each period where the bid-ask spread is the difference between the closing bid and
ask price divided by the mid-point. Major Exchange is equal to 1 if a firm is traded on the Toronto
Stock Exchange, New York Stock Exchange, American Stock Exchange, or NASDAQ, and 0
otherwise. Market Value is stock price times the number of shares outstanding at the end of the
period. Volatility is the standard deviation of daily stock returns during the month. If indicated, we use
the natural logarithm of the raw values. All continuous variables are winsorized at the 1% and 99%
level. *, **, *** denote statistical significance at the 0.10, 0.05, and , 0.01 levels, respectively, based
on t-test for the difference in means and a nonparametric Wilcoxon signed-rank test for the difference
in medians.
50
TABLE 6
Regression Analysis of the Liquidity Effects for IFRS Adoption in Canada by Firms Listed in the US
Variable
Constant
IFRS
US GAAP
Post
IFRS*Post
US GAAP*Post
Major Exchange
Ln(Market Value t-1 )
Ln(Volatility t-1 )
Ln(Share Turnover)
-12.319***
(-18.34)
-0.202
(-1.25)
0.222
(0.83)
-0.031
(-0.17)
-0.101
(-0.44)
0.095
(0.28)
1.734***
(8.00)
0.313***
(5.26)
0.441*
(1.74)
Zero Returns
0.358***
(5.26)
0.051***
(3.99)
0.026
(1.25)
0.023*
(1.67)
-0.006
(-0.32)
-0.016
(-0.51)
-0.097***
(-4.39)
-0.008**
(-2.32)
0.063**
(4.00)
-0.038***
(-8.13)
Ln(Bid-Ask Spread)
0.572
(0.53)
1.217***
(6.27)
2.205***
(5.80)
0.043
(0.24)
0.134
(0.46)
0.253
(0.51)
-0.911***
(-3.40)
-0.304***
(-6.56)
0.454**
(2.55)
-0.357***
(-5.43)
Yes
368
92
Yes
368
92
Yes
368
92
Ln(Share Turnover t-1 )
Industry Fixed Effects
No. of Observations
No. of Sample Firms
2
Adjusted R
57.6%
72.1%
71.2%
Notes:
The sample consists of Canadian firms listed in the US with necessary trading data. Matched pairs of US
firms, based on size and industry, are used as benchmark firms. Liquidity in the post-IFRS (US GAAP)
period is measured for the 12 months beginning the month after a firm changes accounting standards.
Liquidity in the pre-IFRS (US GAAP) period is for the same 12 months, but one year prior. Share
Turnover is the median of the daily turnover during the 12-month period where daily turnover is calculated
as daily share volume divided by the shares outstanding. Zero Returns is the proportion of trading days
with zero returns out of all potential trading days in the 12-month period. Bid-Ask Spread is the difference
between the closing bid and ask price divided by the mid-point. IFRS is equal to 1 if a Canadian firm
adopts IFRS, and 0 otherwise. US GAAP is equal to 1 if a Canadian firm adopts US GAAP, and 0
otherwise. Post is equal to 1 in the period after a firm adopts its new standard, and 0 otherwise. Major
Exchange is equal to 1 if a firm is traded on the Toronto Stock Exchange, New York Stock Exchange,
American Stock Exchange, or NASDAQ, and 0 otherwise. Market Value is stock price times the number
of shares outstanding at the end of the period. Volatility is the standard deviation of daily stock returns
during the six month period. If indicated, we use the natural logarithm of the raw values. All continuous
variables are winsorized at the 1% and 99% level. *, **, *** denote statistical significance at the 0.10, 0.05,
and 0.01 levels, respectively, based on robust standard errors. t-statistics in parentheses.
51
TABLE 7
Regression Analysis of the Liquidity Effects for IFRS Adoption in Canada by Firms not Listed in the US
Variable
Constant
IFRS
Major Exchange
Ln(Market Value t-12 )
Ln(Volatility t-12 )
Ln(Share Turnover)
-15.801***
(-49.28)
-0.257*
(-1.85)
1.726***
(12.59)
0.552***
(40.99)
0.707***
(16.30)
Zero Returns
0.170***
(8.39)
-0.001
(-0.15)
-0.116***
(-14.96)
-0.009***
(-12.56)
0.016***
(6.87)
-0.038***
(-38.72)
Ln(Bid-Ask Spread)
5.120***
(23.43)
0.347***
(3.88)
-1.262***
(-17.04)
-0.525***
(-69.56)
0.177***
(10.12)
-0.143***
(-19.67)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
843 / 3,459
141,183
843 / 3,459
141,183
843 / 3,459
141,183
Ln(Share Turnover t-12 )
Fixed Effects
Country
Industry
Month-Year
Month-Year (Canada specific)
N Canadian/US Firms
N Firm-Month Observations
2
Adjusted R
48.7%
60.1%
78.0%
Notes:
The sample consists of Canadian firms not listed in the US with necessary trading data. US firms are used
as a benchmark. Share Turnover is the median of the daily turnover during each month where daily
turnover is calculated as daily share volume divided by the shares outstanding. Zero Returns is the
proportion of trading days with zero returns out of all potential trading days in each month. Bid-Ask
Spread is the median of the bid-ask spread for each month where the bid-ask spread is the difference
between the closing bid and ask price divided by the mid-point. IFRS is a binary variable that takes on the
value of '1' beginning in the month a company files its first interim filing under IFRS. Major Exchange is
equal to 1 if a firm is traded on the Toronto Stock Exchange, New York Stock Exchange, or NASDAQ,
and 0 otherwise. Market Value is stock price times the number of shares outstanding at the end of the
period. Volatility is the standard deviation of daily stock returns during the month. If indicated, we use the
natural logarithm of the raw values. All continuous variables are winsorized at the 1% and 99% level. *, **,
*** denote statistical significance at the 0.10, 0.05, and 0.01 levels, respectively, based on robust standard
errors clustered by firm. t-statistics in parentheses.
52
TABLE 1A
Events and Predicted Effects on Likelihood of Canadian Adoption of IFRS
Event Date
May 31, 2004
February 10, 2005
March 31, 2005
April 15, 2005
September 7, 2005
January 10, 2006
November 15, 2007
February 13, 2008
Description
Canadian Accounting Standards Board (AcSB) invites
public comment from stakeholders about whether to
keep Canadian GAAP or to adopt either IFRS or U.S.
GAAP.
AcSB proposes adopting IFRS in full to its oversight
body, the Accounting Standards Oversight Council,
while allowing entities that want to do so to use U.S.
GAAP.
AcSB invites public comment on its proposal to adopt
IFRS.
Donald Nicolaisen, Chief Accountant of the SEC,
introduces a possible roadmap to eliminate the
reconciliation requirement for IFRS.
AcSB tentatively decides to continue pursuing its
strategy of adopting IFRS in place of a separate
Canadian GAAP.
AcSB ratifies a strategic plan “The Convergence
Implementation Plan” to adopt IFRS over a five-year
period. SEC registrants will be allowed to use U.S.
GAAP.
The SEC votes to eliminate reconciliation from IFRS
to U.S. GAAP for U.S. foreign private issuers.
AcSB confirms IFRS changeover date as January 1,
2011 for Publicly Accountable Enterprises.
Assessed Effect
on Likelihood
of IFRS
Adoption
Ambiguous
Predicted Market
Reaction if
IFRSbenefits > IFRScosts
(IFRSbenefits < IFRScosts)
Increase
+ (-)
Increase
+ (-)
Increase
+ (-)
Increase
+ (-)
Increase
+ (-)
Increase
+ (-)
Increase
+ (-)
Notes:
This table presents eight events related to Canada’s adoption of IFRS, our assessment of their effect on the likelihood of Canada
adopting IFRS, and the predicted market reaction to each event.
53
TABLE 2A
Overall Canadian Market Reaction to Events Affecting the Likelihood of IFRS Adoption in Canada
Raw Return
U.S. Market
Event Date
Description
Canada
Return
May 31, 2004
Canadian Accounting Standards Board
0.0048
0.0017
(AcSB) invites public comment from
stakeholders about whether to keep
Canadian GAAP or to adopt either IFRS
or U.S. GAAP.
February 10, 2005
AcSB proposes adopting IFRS in full to
0.0122
0.0033
its oversight body, the Accounting
Standards Oversight Council, while
allowing entities that want to do so to
use U.S. GAAP.
March 31, 2005
AcSB invites public comment on its
0.0161
0.0089
proposal to adopt IFRS.
-0.0080
-0.0238
April 15, 2005
Donald Nicolaisen, Chief Accountant of
the SEC, introduces a possible roadmap
to eliminate the reconciliation
requirement for IFRS.
September 7, 2005
AcSB tentatively decides to continue
0.0014
0.0113
pursuing its strategy of adopting IFRS in
place of a separate Canadian GAAP.
January 10, 2006
AcSB ratifies a strategic plan “The
0.0033
0.0085
Convergence Implementation Plan” to
adopt IFRS over a five-year period.
SEC registrants will be allowed to use
U.S. GAAP.
November 15, 2007
The SEC votes to eliminate
-0.0065
-0.0153
reconciliation from IFRS to U.S. GAAP
for U.S. foreign private issuers.
Market-Adjusted
Return Canada
0.0031
0.0089
0.0072
0.0158
-0.0099
-0.0052
0.0088
(continued on next page)
54
February 13, 2008
AcSB confirms IFRS changeover date
as January 1, 2011 for Publicly
Accountable Enterprises.
0.0059
0.0074
-0.0015
Mean Return across Events
t-statisticvs0
t-statisticvs278
p-valuebootstrap
0.0036
0.0002
0.0034
1.13
0.85
0.18
Notes:
This table presents three-day portfolio returns for the eight events identified as relating to Canada’s adoption of IFRS. Raw Return
Canada is the three-day value-weighted return to the 653 Canadian firm portfolio, centered on the event date. U.S. Market Return is
the three-day value-weighted return for the U.S. market obtained from CRSP, centered on the event date. Market-Adjusted Return
Canada is the difference between Raw Return Canada and U.S. Market Return. Mean Return across Events is computed as the mean
of the eight event returns. t-statisticvs0 assesses whether the mean return differs from zero. t-statisticvs278 assess whether the mean
return differs from the mean return for 278 non-overlapping non-events, chosen across the sample period. p-valuebootstrap is the
proportion of 500 draws for which the standardized mean return across 8 randomly selected non-events exceeds the standardized mean
event return.
55
TABLE 3A
Descriptive Statistics for Firms Used in Cross-Sectional Analysis of Firm's Stock Price
Reactions to IFRS Adoption Events in Canada
Panel A: Descriptive Statistics
Variable
Mean
Median
CMAR
0.0081
0.0008
Size
4.74
4.69
US Listed
0.29
0.00
US GAAP
0.04
0.00
Turnover
0.50
0.00
Herf
0.02
0.00
Big4
0.77
1.00
Code
0.13
0.00
Panel B: Industry Distribution
Industry (Two-Digit SIC Codes)
Frequency
Percentage
Mining (10-14)
2,000
36%
Manufacturing (20-39)
1,616
29%
Transportation and Utilities (40-49)
424
8%
Services (70-89)
488
9%
Finance, Insurance, and Real Estate (60-67)
560
10%
Other
416
8%
Total
5,504
100%
Notes:
The sample consists of Canadian firms with three-day returns for each of our 8 event dates.
CMARj,e is the firm's cumulative market-adjusted return, measured as the three-day return
centered on the event date minus the three-day return to the U.S. value-weighted index.
Size is the natural logarithm of the firm's prior end of year market value of equity. US
Listed is equal to 1 if the firm is listed in the U.S., and 0 otherwise. US GAAP is equal to 1
if the firm uses U.S. GAAP, and 0 otherwise. Turnover is an indicator variable equal to 1
if the firm's mean daily percentage shares traded during the year is above the median for all
firms, and 0 otherwise. Herf is the Herfindahl Index, measured as the sum of each firm's
squared percentage market-share, calculated at the two-digit industry level. Big4 is equal
to 1 if the firm's auditor is Deloitte, PricewaterhouseCoopers, KPMG, or Ernst & Young,
and 0 otherwise. Code is equal to 1 if the firm is domiciled in Quebec, and 0 otherwise.
56
TABLE 4A
Cross-Sectional Analysis of Firm's Stock Price Reactions to IFRS Adoption
Events in Canada
Variable
Expectation
Constant
Coefficient
0.017***
(4.88)
Size
-
-0.002***
(-2.73)
US Listed
-
0.001
(0.38)
US GAAP
+/-
Turnover
+
-0.004
(-0.72)
0.001
(0.58)
Herf
+
0.002
(0.29)
Big4
+
0.001
Code
-
-0.003*
(0.30)
(-1.61)
Firm Events
Firms
5,504
688
R2
0.25%
Notes:
The sample consists of Canadian firms with three-day returns for each of our eight event dates.
CMARj,e is the firm's cumulative market-adjusted return, measured as the three-day return
centered on the event date minus the three-day return to the U.S. value-weighted index. Size is
the natural logarithm of the firm's prior end of year market value of equity. US Listed is equal to
1 if the firm is listed in the U.S., and 0 otherwise. US GAAP is equal to 1 if the firm uses U.S.
GAAP, and 0 otherwise. Turnover is an indicator variable equal to 1 if the firm's mean daily
percentage shares traded during the year is above the median for all firms, and 0 otherwise. Herf
is the Herfindahl Index, measured as the sum of each firm's squared percentage market-share,
calculated at the two-digit industry level. Big4 is equal to 1 if the firm's auditor is Deloitte,
PricewaterhouseCoopers, KPMG, or Ernst & Young, and 0 otherwise. Code is equal to 1 if the
firm is domiciled in Quebec, and 0 otherwise. *, **, *** denote statistical significance at the
0.10, 0.05, and 0.01 levels (one-tailed when predicted direction), respectively, based on robust
standard errors clustered on two-digit SIC code (Petersen, 2009). t-statistics in parentheses.
57