Voluntary Disclosures of Gaap Differences by Cross-Listed Firms : The Case of Canadian Sec Registrants

The Securities and Exchange Commission (SEC) of the USA requires that Canadian firms cross-listed in stock exchanges reconcile their earnings using Canadian GAAP to what earnings would have been had US GAAP been used. Prior literature has examined the capital market implications of such mandatory reconciliation disclosures. The existing evidence pertaining to the usefulness of such disclosures is mixed. However, a number of Canadian firms also reconcile their Canadian GAAP based shareholders' equity (SE) balance to shareholders' equity based on US GAAP, voluntarily, thus providing a rare and important opportunity to revisit the usefulness of reconciliation disclosures. These firms tend to be traded more heavily in US stock exchanges than on Canadian stock exchanges, are more heavily represented in the mining industry, and have a higher proportion of US dollar revenue to total revenue. We hypothesize and find evidence that the voluntarily provided SE differences are value relevant. For SE reconciliation disclosures, our results suggest that the relative explanatory power of Canadian GAAP differs significantly from US GAAP. This is consistent with a perceived benefit (higher stock price/lower cost of capital due to information asymmetry reduction) to offset the incremental (preparation, attestation) costs of SE disclosures for such firms. For non-SE reconciliation disclosures, our results suggests that, in terms of relative explanatory power, the choice of GAAPs in a "coin toss". Since there is no information asymmetry to reduce through voluntary disclosures, this is consistent with little of no benefits to offset the incremental costs of SEC disclosures for such firms. A secondary contribution of our study is to provide evidence pertinent to the current Canadian policy issue (being examined by the Task Force of Standard Setting of the Canadian Institute of Chartered Accountants) as to whether there is a need for a unique Canadian GAAP. For our overall sample (combining SEC reconciliation disclosures and non- disclosures), the choice of GAAP is a "coin toss" in that each GAAP has the same explanatory power for stock returns. Though such evidence, for Canadian cross-listers, many not generalize to all Canadian companies, the case for claiming a benefit to investors from a separate Canadian standard setting process is weak