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Did Mandatory Adoption of IFRS Increase Liquidity in the Canadian Stock Markets?

In this study, we investigate whether average liquidity for non-U.S. firms traded on Canadian stock exchanges increased or decreased after mandatory adoption of IFRS in Canada. We consider two competing forces affecting liquidity from IFRS adoption: enhanced comparability of firms within industries that span international boundaries and less tailoring of financial reporting to satisfy local investor needs. We find that liquidity decreased for Canadian and non-U.S. international firms traded on the Canadian exchanges, suggesting that the benefits of global comparability were not sufficient to offset the loss of local investor accommodation. To provide perspective on these results for Canadian exchanges, we also compare liquidity before and after IFRS adoption for firms traded on the U.K. and Australian exchanges. These three countries share the British influence on financial reporting historically and have similar legal and institutional settings. We expect that the benefits of global comparability would be relatively greater for the U.K. exchanges relative to the Canadian and Australian exchanges given the U.K.’s proximity and commerce with other European countries. We find that liquidity increased for the U.K. exchanges but decreased for the Australian exchange, supporting the interpretation of the Canadian findings. We also compare changes in liquidity between the two Canadian exchanges, the more global and senior Toronto Stock Exchange (TSX) and the more local and retail-oriented TSX Venture Exchange (TSXV). We find that the decrease in liquidity after IFRS adoption was significantly greater for the TSXV exchange, consistent with the trade-off between global comparability and accommodating local investor needs.