Accounting Diversity and the Value Relevance of Accounting Earnings and Book Value in Four Countries-The United States, the United Kingdom, Canada and Japan

ABSTRACT Diversities in accounting standards across different countries are of serious concern to the international investment community. Analysts, investors and security regulators have indicated that accounting differences can affect the usefulness of accounting numbers in assessing firm values (Choi andMueller 1992). This paper investigates the impact of accounting diversity on the relative value relevance of accounting summary numbers in four countries: the United States, the United Kingdom, Canada and Japan. Accounting systems of these four countries are of interest because of the varying degree of perceived conservatism in accounting measurement practices across these four accounting systems and the size of the capital markets in these four countries. To assess the differences in value relevance of two accounting summary numbers, earnings and book value, across different countries, we use empirical models and measurements that allow direct comparisons of the weights assigned to accounting earnings and book value by market participants of these four countries. To compare the relative value relevance of accounting earnings with that of accounting book value within each country, we use a standardized procedure to control the scale differences in earnings and book value so that the earnings valuation coefficient and the book value valuation coefficient can be compared. A ratio measure, which scales the valuation coefficients by the overall informativeness of earnings and book value of each country, is used to allow additional cross-country comparisons. The results show that systematic differences in the importance of earnings and book value do exist across national boundaries. On average, earnings are more important than book value in explaining firm values in the U.S. and the U.K., while book value is more important than earnings in Canada and Japan. In a model incorporating both earnings and book value to explain market values, accounting earnings and book value both have incremental value relevance over each other for the U.S. and Canadian samples. However, U.K. accounting book value and Japanese earnings do not consistently have incremental value relevance. Our results also indicate trends of change in the overall, as well as the relative, importance of earnings and book value over the sample period. In particular, the overall value relevance of accounting earnings and book value increases over time for all four countries, and the value relevance of accounting book value relative to accounting earnings increases in both Canada and the U.K. over the sample period. Neither the U.S. or Japan show significant changes in the relative value relevance of the accounting numbers over the sample period. INTRODUCTION Diversities in accounting standards in different countries pose significant challenges to the international investment community. While current efforts to harmonize international accounting standards by the International Accounting Standards Committee (IASC) and the International Organization of Securities Commissions (IOSCO) are laudable, differences in accounting standards across national boundaries largely remain a fact of life. Although participants in the international investment community recognize that differences in accounting measurement and disclosure rules across countries can affect the usefulness of accounting numbers in accessing firm values and affect the flow of international capital, empirical evidence on the comparative impact of accounting diversity on firm valuation across various accounting regions is still limited. This paper investigates the impact of accounting diversity on the relative value relevance of accounting summary numbers in four countries: the United States, the United Kingdom, Canada and Japan. These four countries are highly developed nations with historically different accounting concepts and accounting practices. Each of these four countries also has very active capital markets 1 and high levels of foreign direct investment flows. …

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