Earnings Quality: Evidence from Canadian Firms' Choice between IFRS and U.S. GAAP

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), but permitted firms cross-listed in the United States to adopt U.S. GAAP instead. We document that the number of Canadian firms reporting under U.S. GAAP increased after Canada adopted IFRS. We find that cross-listed firms are more likely to choose IFRS, if IFRS is the standard most commonly used by the leading global firms in their industry. In addition, we find that firms more likely to choose IFRS are larger, of civil law legal origin, have less U.S. operations, report exploration expense, have fewer U.S. shareholders, and report higher stockholders' equity under Canadian GAAP than under U.S. GAAP. Of these, we find that the convergence benefits of comparability with industry peers are the most significant determinant in firms' choice of standard. Further, we are unable to document changes in earnings quality from cross-listed firms adopting IFRS or U.S. GAAP or that earnings quality changed for firms adopting IFRS relative to firms adopting U.S. GAAP.