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 thesix countries. While the differences appear to be substantial, it is an empirical questionwhether they result in meaningful violations of the CSR or in significant accounting bias(conservatism), the important factors for the residual earnings model. Accounting bias willlikely 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 valuedepending on whether the violation moves book value toward or away from marketvalues. Because countries differ on both dimensions, ex ante hypotheses on which effectwill dominate are problematic. Even so, we expect that bias and CSR violations will affectthe value relevance of accounting numbers in systematic ways. Particularly becausePhilippine 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 inTaiwan. Because both Indonesian and Malaysian firms capitalize leases and R&Dexpenditures and use the equity method we expect the value relevance of their bookvalues to exceed the value relevance of book value in Thailand and Taiwan. BecausePhilippine firms amortize both goodwill and asset revaluations to income, we expect thevalue relevance of residual earnings to be high in the Philippines.
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