Does Mandatory Adoption of IFRS Enhance Earnings Quality? Evidence from Closer to Home

Abstract

Canada adopted IFRS in 2011 and firms were required to provide reconciliation from Canadian GAAP (CGAAP) to IFRS for the fiscal year before the adoption. We run a “horse race” of earnings quality between CGAAP and IFRS. Further, by making use of a natural experiment and a single country focus, our study does not suffer from potential omitted variables arising from differences in socio-economic, political, and legal environments across sample firms. We find that on average, relative to IFRS-earnings, earnings under CGAAP has greater association with next period cash flows. Further, when the difference between earnings under CGAAP and IFRS is large, IFRS-earnings is less value-relevant and less persistent. The results strongly support the notion that higher earnings quality is associated with CGAAP. Finally, our results indicate that differences between CGAAP and IFRS with regard to accounting for financial instruments and investments significantly impair the quality of IFRS-earnings.