Our examination of accounting practices reveals some systematic differences across the
six countries. While the differences appear to be substantial, it is an empirical question
whether they result in meaningful violations of the CSR or in significant accounting bias
(conservatism), the important factors for the residual earnings model. Accounting bias will
likely reduce the explanatory power of both book value and earnings. Furthermore,
violations of the CSR may either increase or decrease the explanatory power of book value
depending on whether the violation moves book value toward or away from market values. Because countries differ on both dimensions, ex ante hypotheses on which effect will dominate are problematic. Even so, we expect that bias and CSR violations will affect the value relevance of accounting numbers in systematic ways. Particularly because Philippine firms record both goodwill and asset revaluations and Taiwan firms do neither, we expect the value relevance of book value to be greatest in the Philippines and least in Taiwan. Because both Indonesian and Malaysian firms capitalize leases and R&D expenditures and use the equity method we expect the value relevance of their book values to exceed the value relevance of book value in Thailand and Taiwan. Because Philippine firms amortize both goodwill and asset revaluations to income, we expect the value relevance of residual earnings to be high in the Philippines.
Our examination of accounting practices reveals some systematic differences across the
six countries. While the differences appear to be substantial, it is an empirical question
whether they result in meaningful violations of the CSR or in significant accounting bias
(conservatism), the important factors for the residual earnings model. Accounting bias will
likely reduce the explanatory power of both book value and earnings. Furthermore,
violations of the CSR may either increase or decrease the explanatory power of book value
depending on whether the violation moves book value toward or away from market values. Because countries differ on both dimensions, ex ante hypotheses on which effect will dominate are problematic. Even so, we expect that bias and CSR violations will affect the value relevance of accounting numbers in systematic ways. Particularly because Philippine firms record both goodwill and asset revaluations and Taiwan firms do neither, we expect the value relevance of book value to be greatest in the Philippines and least in Taiwan. Because both Indonesian and Malaysian firms capitalize leases and R&D expenditures and use the equity method we expect the value relevance of their book values to exceed the value relevance of book value in Thailand and Taiwan. Because Philippine firms amortize both goodwill and asset revaluations to income, we expect the value relevance of residual earnings to be high in the Philippines.
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