Raymond D. King

Accounting diversity and firm valuation

This study examines the relation between accounting numbers and stock prices across three countries: Germany, Norway, and the United Kingdom (UK). The analysis follows the residual income valuation model. Accounting in the three countries varies in faithfulness to clean surplus accounting and in bias (conservatism). We address three questions. Are there differences across countries in the value relevance of accounting? Second, are there differences in the incremental and relative value relevance of book values and earnings per share (EPS)? Third, do future earnings realizations explain current stock prices? We find book value and EPS are positively and significantly related to stock prices across all three countries. German accounting numbers have the lowest relation with stock prices (R2 40%), while UK and Norwegian accounting numbers explain 70% and 60% respectively of variation in stock prices. Second, the incremental and relative value relevance of book value and of EPS differs across time and countries. Book values explain more than EPS in Germany and Norway, but less in the UK. Finally, future income realizations explain little about market prices not explained by current book value and EPS.

Accounting Practices and the Market Valuation of Accounting Numbers: Evidence from Indonesia, Korea, Malaysia, the Philippines, Taiwan, and Thailand

Abstract This study examines the relation between stock prices and accounting earnings and book values in six Asian countries: Indonesia, South Korea, Malaysia, the Philippines, Taiwan, and Thailand. The analysis is based on a residual earnings model that expresses the value of the firm in terms of book value and residual income. The model holds for any clean surplus accounting system. However, for finite time horizons, biased accounting may affect model estimates. The six countries examined in this study differ in faithfulness to clean surplus accounting as well as bias (conservatism). The study addresses two questions. First, are there systematic differences across countries in the value relevance of accounting, and are these differences related to accounting differences? Second, are there systematic differences in the incremental and relative information content of book value per share (BVPS) and abnormal (residual) earnings per share (REPS) across the countries, and are such differences related to accounting differences? We find differences across the six countries in the explanatory power of BVPS and REPS for firm values. Explanatory power for Taiwan and Malaysia is relatively low while that for Korea and the Philippines is relatively high. These differences are generally consistent with differences in accounting practice; however, since Korean accounting practice is strongly influenced by tax law, we did not expect the high association for Korea. Second, with respect to the incremental and relative explanatory power of BVPS and REPS, we find BVPS to have high explanatory power in the Philippines and Korea but little in Taiwan. In all six countries REPS has less explanatory power than BVPS in most years. Again, the evidence may be interpreted as suggesting accounting practice affects valuation (with Korea again as the exception). Finally, we provide evidence on the sensitivity of the timing of comparisons of stock prices and accounting values. We find that comparing prices at year-end (even though annual accounting information has not been released at that time), in general, provides the highest correlation between market and accounting numbers.

The Value Relevance of Accounting Information during a Financial Crisis: Thailand and the 1997 Decline in the Value of the Baht

This study addresses whether the financial turmoil surrounding the devaluation of the baht affected the value relevance of Thai accounting information. Our results suggest a decline in the value relevance of Thai book values and earnings following the devaluation. Prior to mid 1997 the Bank of Thailand pegged the value of the baht to a basket of currencies of which 80 percent was weighted to the US dollar. In response to pressure by currency speculators the bank abandoned its peg on July 2 1997 in favor of a managed float. The devaluation was followed by volatile exchange rates. The change in value relevance of accounting information after the devaluation may be attributable to the initial recognition of foreign exchange losses and the subsequent recognition of foreign exchange gains as exchange rates fell and then recovered.