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Earnings Quality Differential Between Canadian and U.S. Public Companies

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  • Kamalesh Gosalia

    ()
    (Certified General Accountants Association of Canada)

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    Abstract

    The quality of earnings is said to be high if it can be directly attributed to fundamental economic factors like higher revenues or lower costs rather than through accounting shenanigans. This study considers how the two different financial reporting regimes used in Canada and in the US impact earnings quality. To that end, the study looks at the earnings quality differential between Canadian and US public companies. The “Accrual Ratios” are employed as the proxy for earnings quality. The SAS statistical software is used to construct a mixed model (SAS: Proc Mixed) to assess the effect of country, year and sector on accrual ratios. Additional models using the log of accrual ratios as the outcome are also tested. Accrual ratios for Canadian and US companies for ten economic sectors are compared over the period of 1998 to 2008. Controlling for year effects, no differences are found between the two countries except for the Materials sector in 2000 and the Consumer Discretionary sector in 1998 and 2005. Instead, accrual ratios show much more variability between companies than between countries. As such, the study concludes that there is no statistical evidence suggesting that the financial statements prepared under the Canadian regime reveal better earnings quality than those prepared under the US regime.

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    File URL: http://ideas.cga-canada.org/WorkingPapers/100301.pdf
    File Function: First version, 2010
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    Bibliographic Info

    Paper provided by Certified General Accountants Association of Canada in its series Working Papers with number 100301.

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    Length: 50 pages
    Date of creation: Mar 2010
    Date of revision:
    Handle: RePEc:cga:wpaper:100301

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    Keywords: quality of earnings; financial reporting; oversight effect; accrual ratio; accrual earnings;

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