U.S.-Canada Accounting Differences and Their Effect on Stock Pricing Models

Abstract

Previous research on U.S.-Canada accounting differences is not conclusive about their information content. This paper re-examines reported reconciliations between Canadian and U.S. GAAP and concludes about their value-relevance. Cross-listed Canadian firms follow and report under two accounting regimes that produces a pair of accounting ratios obtained under U.S. and Canadian GAAP. This study uses difference in book-to-market and financial distress measures under the two accounting regimes and examines their association with subsequent stock returns. Although U.S.-Canada accounting differences are not large in magnitude, the difference in factors values using Canadian and U.S. GAAP explains significantly better stock returns.