Canada's Mandatory Adoption of IFRS: Impact on Market-Based and Non-Market-Based Accounting Quality
57 Pages Posted: 13 Sep 2018 Last revised: 4 Dec 2019
Date Written: October 27, 2019
Canada adopted International Financial Reporting Standards (IFRS) in 2011. We investigate the impact and consequences of this mandatory change by examining whether the quality of market-based and non-market-based accounting information changed for a comprehensive set of Canadian companies on the Toronto Stock Exchange (TSX). Our findings reveal the effects of IFRS adoption are not consistent across all firms as demonstrated by a minimal change in market-based accounting quality (value relevance) for large firms included in the S&P/TSX composite index, but a significant increase for small firms (firms included in the TSX but not in the index). These differences are primarily attributed to the weakening (strengthening) relationship of book value to stock price for large (small) firms and a strengthening (weakening) relationship of earnings to stock price for large (small) firms. This suggests the goal of IFRS in providing improvement to the balance sheet is only achieved for small firms in Canada. For the non-market-based accounting quality measures of earnings persistence, earnings smoothing, earnings discretion, and the frequency of small profits to losses, we find the magnitude of accounting quality, proxied by these measures, is mixed for large firms, but improves for small firms after IFRS adoption.
Keywords: IFRS, Value relevance, Book value, Accounting quality, Canadian firms
JEL Classification: M41
Suggested Citation: Suggested Citation