Mandatory adoption of IFRS and its effect on international stock listings in Canada
| Published date | 07 March 2020 |
| Pages | 409-429 |
| DOI | https://doi.org/10.1108/JFRC-01-2020-0010 |
| Date | 07 March 2020 |
| Author | Shahid Khan,Khaled Abdou,Sudip Ghosh |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Mandatory adoption of IFRS and
its effect on international
stock listings in Canada
Shahid Khan,Khaled Abdou and Sudip Ghosh
Pennsylvania State University, Berks, Pennsylvania, USA
Abstract
Purpose –The purpose of thisstudy is to investigate if non-US/non-Canada (international)equity listings in
the Canadian stock exchanges increased with the adoption of International Financial Reporting Standards
(IFRS) in Canada. A question of interest is whether the adoption of common global accounting standards
(IFRS) was beneficialin attracting international firms to the Canadian exchanges.
Design/methodology/approach –The authors use difference-in-difference ordinary least square
methodologyto conduct inter-country (between Canada and the USA) and intra-country(between the Toronto
Stock Exchange [TSX] and the TSX Venture Exchange [TSXV]) tests to investigate whether there is
increased listingsof international firms on Canada’s exchanges associated with mandatoryadoption of IFRS
in Canada comparedto such listings in the American exchanges.
Findings –The authors did not find evidence of a relativeincrease in listings by international firms on the
TSX and the TSXV after Canadianadoption of IFRS, but they did find that listings by internationalfirms on
the TSX, Canada’s primary exchange, increased when the authors include the year before mandatory
Canadian adoptionas part of the IFRS adoption period. The authors also find that internationallistings from
outside the North American, European and Australasian regions increased on the TSXV, consistent with
IFRS adoptionmaking the smaller Canadian exchange more attractiveto listers from these regions.
Originality/value –With the increasinguse of IFRS throughout the world, US regulators, the US Congress
and other capital market participantsseek to understand the costs and benefits of potential IFRS adoption in
the USA. The authors contribute to this debate by examining the effect of Canada’s adoption of IFRS on
growth in internationalstock listings in the Canadian stock exchanges.
Keywords International financial reporting standards, Stock market, Accounting standards,
Domestic listings, Equity listings, International listings
Paper type Research paper
1. Introduction
“And it is actually true,in some respects, that the Canadian environment [...]probably most
resembles the situationthat the U.S. is going to be in if it makes a similar kind of decision.”–
Tricia O’Malley, FormerAccounting Standards Board (AcSB) and International Accounting
Standards Board(IASB) member, speaking of the Canadian decision to adoptIFRS.
With increasing use of International Financial Reporting Standards (IFRS) throughout
the world, US regulators, the US Congress and other capital market participants seek to
understand the costs and benefits of potential IFRS adoption in the USA. We contribute to
this debate by examining theeffect of Canada’s adoption of IFRS on growth in international
stock listings in the Canadianstock exchanges. Canada adopted IFRS in 2011, more recently
than other countries studied in prior IFRS literature. We investigate whether there is
increased listing of international firms on Canada’s exchanges, the TorontoStock Exchange
(TSX) and the TSX Venture Exchange (TSXV), associated with mandatory adoption of
IFRS in Canada, compared to suchlistings in our control group (without IFRS) that includes
the US’s two primary exchanges, the New York Stock Exchange (NYSE) and the National
IFRS and its
effect
409
Received17 January 2020
Revised20 January 2020
Accepted20 January 2020
Journalof Financial Regulation
andCompliance
Vol.28 No. 3, 2020
pp. 409-429
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-01-2020-0010
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
Association of Securities Dealers Exchange (NASDAQ). We do not find evidence of a
relative increase in listings by internationalfirms on the TSX and the TSXV after Canadian
adoption of IFRS, but we do find that listings by international firms on the TSX, Canada’s
primary exchange, increased when we include the year before mandatory Canadian
adoption as part of the IFRS adoption period. We also find that international listings from
outside the North American, European and Australasian regions increased on the TSXV,
consistent with IFRS adoption making the smaller Canadian exchange more attractive to
listers from these regions.
We believe that IFRS adoption in Canada provides a useful natural experiment to
evaluate the possible impact of IFRS on international listing in the US stock exchanges for
the following reasons. Prior to IFRS adoption, Canadian generally accepted accounting
principles (GAAP) were considereda near “twin”to US GAAP (Burnett et al., 2015;Webster
and Thornton, 2005;Bandyopadhyayet al., 1994)[1]. Canada’s culture, political environment,
regulatory strength,legal/economic institutions and stability are more similarto those in the
USA than any other country in the world[2]. Furthermore, Canada is tied to the USA both
geographically and economically –the countriesshare the longest border in the world, and
Canada is the USA’s largest tradingpartner.
“In contrast to continental Europe, Canada has a legal and regulatory regime that is
much closer to the USA. Hence, an analysisof IFRS in that context is likely to provide more
salient evidence.”Cormierand Magnan (2016).
Our study adds to the IFRS listings literature by investigating IFRS implementation
in a single country, compared to previous studies that examined multi-country
implementation (Han and He, 2011;Chen et al., 2015). Limiting our test to Canada controls
for many contemporaneous macro-economic factors that are difficult to control in inter-
country tests which involves many countries. Previous studies document an increase in
international listings or other capital market benefits in the post-IFRS adoption period
based largely on the evidence of European adoptions of IFRS (Daske et al., 2008;
Landsman et al., 2012;Han and He, 2011;Chen et al., 2015). Canada adopted IFRS in 2011
in relative isolation because most of the jurisdictions in Europe and Asia had already
adopted IFRS (Khan et al., 2019). De George et al. (2016) argue that it is highly likely that
many countries that adopted IFRS experienced greater listings or other capital market
benefits because of contemporaneous increases in enforcement (e.g. better auditing
standards), rather than solely from their adoption of IFRS. Recently, opposite to their
expectations, Krishnan and Zhang (2019) show that Canadian GAAP is associated with
higher earnings quality than with IFRS.[AQ5] Also, Khan et al. (2019) show that
Canadian firms did not benefit from greater international institutional investment in the
post-IFRS adoption period.
Previous literature provides multiple reasons why international listings would
increase after the adoption of IFRS (Chen et al., 2015;Wang and Wu, 2019). Specifically,
use of IFRS may increase the quantity and quality of disclosures and financial
information provided, and its common use results increased comparability of financial
statements across countries (Ashbaugh and Pincus, 2001;Hong et al., 2014;Florou and
Pope, 2012;DeFond et al., 2011;Wang and Wu, 2019). This reduces the disclosure cost
concerns for international firms wishing to list or cross-list to increase the attractiveness
of their firms to foreign investors.
Many previous IFRS studies have documented that IFRS adoption is associated with
capital markets benefits (e.g. higher liquidity, greater information quality, lower cost of
capital, greater institutional investment and higher analyst coverage) (Daske et al.,2008;
Landsman et al.,2012;Han and He, 2011;Chen et al.,2015;Wang and Wu, 2019). With such
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