A comparison of the relative value relevance of accounting earnings and book values in Germany, Japan and the United States

Diversity in international accounting systems can impede the use of accounting information across countries. This has led the International Accounting Standards Committee to develop a set of global accounting standards which could facilitate international financial analysis. International accounting research can aid in this process by providing evidence on the effects of different accounting standards in the capital markets.;This study examines the value relevance of accounting earnings and book values in three countries: Germany, Japan and the United States (U.S.) where value relevance is defined as the correlation between accounting information and the market value of equity. This study investigates three issues: the relative value relevance of earnings and book values within countries, the relative value relevance of an earnings model across countries and the relative value relevance of an earnings and book value model across countries.;Germany and Japan are similar in both their accounting and institutional frameworks and they contrast with the U.S. German and Japanese accounting is more conservative, creditor-oriented and tax-based than U.S. accounting. The German and Japanese capital provider systems are characterized by close-knit relationships between capital providers and investee firms which result in interlocking directorships, cross-holdings and a more informal, insider information dissemination process. Also, banks supply a larger proportion of debt and equity capital than in the U.S. The U.S. system is more market-oriented, with a dispersed ownership structure characterized by diverse shareholders.;It is hypothesized that book value is more value relevant than earnings in Germany and Japan while the opposite is expected for the U.S. The results support this hypothesis. Book value is more value relevant than earnings in Germany and Japan while earnings are more value relevant than book value in the U.S. It is also hypothesized that the value relevance of earnings is lower in Germany and Japan than in the U.S. The results of the study confirm this. Earnings are less value relevant in Germany and Japan than in the U.S. Finally, it is hypothesized that the earnings and book value model is less value relevant in Germany and Japan. The results show that the model is less value relevant in Japan than in the U.S., but in Germany the earnings and book value model is more value relevant than it is in the U.S.;The results of the study show that accounting information is not comparable and is used differently across countries which indicates a need for flexibility in international accounting standards.