Valuation of Canadian- vs. U.S.-Listed Equity: Is There a Discount?

The authors examine how the valuation multiples assigned to the equity of Canadian-listed firms compare with the equity of comparable firms listed in the United States. They find that Canadian-listed firms trade at a discount to U.S.-listed firms across a range of valuation measures. Differences in accounting do not explain this discount, based on a comparison of Canadian interlisted firms that report under both Canadian and U.S. generally accepted accounting principles. This discount exists despite Canadian-listed firms having a lower cost of equity and higher profitability than comparable U.S-listed firms. Consistent with theory, part of the differences in valuation are explained by company-specific factors, such as industry, firm size, cost of equity, or profitability. The authors also find that characteristics of the stock market where the share is listed affect valuation, such as secondary market liquidity and the relative performance of the overall equity market. They find that a country discount persists after controlling for these company-specific and market-specific factors, which suggests that Canadian and U.S. financial markets remain segmented.