Effects of IFRS adoption on earnings quality: Evidence from Canada

This paper examines effects of the IFRS adoption on earnings quality of 1245 Canadian firms. The recent adoption of International Financial Reporting Standards (IFRS) in Canada is of interest to regulators not only in Canada but also in the U.S. because strong similarities exist between the U.S. and Canada (in accounting standards as well as in institutional factors) and because the Canadian Accounting Standard Board (AcSB) allows Canadian firms listed on U.S. exchanges to choose between IFRS and U.S. GAAP. I analyze the overall effects of IFRS adoption as well as the cross-sectional variation of such effects on a wide range of earnings quality measures, including: earnings persistence, earnings predictability, persistence of earnings components, cash flow predictability, accruals quality, value relevance, earnings smoothness, conservatism, and timeliness. I find that earnings quality, on average, slightly improves after the adoption. Controlling for pre-adoption differences, I also find that IFRS adopters seem to have higher earnings quality than US GAAP adopters. Additionally, earnings quality of firms in extractive industries, insurance industries, and high-litigation risk industries seems to decline while that of firms in other industries does not change significantly. Finally, firms with incentives to transparent reporting surprisingly have declining earnings quality after the adoption whereas firms without such incentives have steadier earnings quality. Taken all together, the findings suggest that standard setters and researchers should probably not consider the effects of IFRS in isolation of firms’ reporting incentives and that the SEC and the FASB’s concerns about the lack of implementation guidance in extractive industries, insurance industries, and high-litigation-risk industries are warranted.

Many thanks to Mr. Hai Ta’s Committee Members: Committee Chair: Gordian Ndubizu, Ph.D. Professor of Accounting Committee Member: Hsihui Chang, Ph.D. KPMG Professor of Accounting and Department Head Committee Member: Anthony Curatola, Ph.D. Joseph F. Ford Professor of Accounting Committee Member: Orakwue B. Arinze, Ph.D. Professor of Management Committee Member: Edward Werner, Ph.D. Assistant Professor of Accounting, Rutgers-Camden