The effect of mandatory IFRS adoption on the value of cash: the case of Canada

Abstract

I examine the change in the marginal value of corporate cash in Canadian firms pre and post the adoption of IFRS in Canada. I find that the marginal value of cash decreased significantly in Canadian firms following IFRS adoption. This decrease is significant relative to the change in the value of cash for a matched US control sample. Advocates of IFRS argue that one of its main benefits is the fact that a uniform set of accounting standards should help to facilitate cross-border financing. This improved access to cross-border financing is most plausible for firms with similar foreign counterparts, and is most important for those firms who exhibit the greatest need for external capital. I find that the post-IFRS decrease in the marginal value of cash is most evident for firms that have a larger number of similar firms in non-Canadian IFRS regimes, and for firms with high growth potential and low availability of internal cash. These findings are consistent with the contention that the decrease in the marginal value of cash is attributable to Canadian firms’ improved access to external financing after IFRS adoption.