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Commentary on Differences in the valuation of Earnings and Book value: Regulation Effects or Industry Effects?
Walker, M
The International Journal of Accounting. 2005;40(4):391-393.
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Abstract
This study contributes to the growing literature on cross-country differences in the value relevance of earnings and book value, focusing on the United Kingdom, France, Germany, and the Netherlands. The paper highlights four issues: 1. The potential improvements in value relevance obtained by partitioning earnings into its cash and accruals components. 2. The potential improvements in the explanatory value obtained by partitioning the sample according to industry. 3. The potential improvements in the explanatory value obtained by partitioning the sample according to country. 4. How the out-of-sample forecasting performance of the model varies according to the partitions outlined above. The authors find that the cash/accrual partition is only significant in the Netherlands and the United Kingdom. This result extends to the out-of-sample forecasting performance of the models when one allows the parameters of the model to vary by country. However it makes no difference in the pooled model, or when parameters vary by industry but not country. The authors do not present results that allow for both industry and country variation. In general the authors find, both in-sample and out-of-sample, that the model improvements achieved by allowing industry variation in the parameter values is greater than that achieved by allowing cross-country variation. This suggests that fundamental industry effects are more important than the cross-country differences that, the authors argue, are mainly due to differences in accounting rules and practices. I believe the results of the authors are interesting, and worthy of further development. However, I also do have one major policy concern about the paper, and a number of suggestions for further development of the work.
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- Related website http://www.sciencedirect.com/science/article/B6W4P-4GNKRY5-1/2/8a7f60efb2b90706ce95f75b658bb458