Article ID Journal Published Year Pages File Type
1006025 Journal of Accounting and Public Policy 2008 16 Pages PDF
Abstract
We study the importance of homogeneous accounting data when testing international versions of asset pricing models. Specifically, we focus on a pricing model commonly used by practitioners - the Fama-French three-factor model - which uses accounting information and has traditionally performed poorly at the cross-country level. We show that international versions of the model perform significantly better if the accounting information is homogeneous across firms. We apply the model to a set of firms that follow common accounting standards - the IAS/IFRS - and also to firms that have issued ADRs in the US - and therefore must report following both US GAAP and their own domestic standards. In both cases our results show that the accounting dimension is relevant: the use of homogeneous accounting measures allows for much higher goodness-of-fit of international versions of the three-factor model, at levels similar to those of domestic versions and superior to those of non-homogeneous versions. This suggests that further accounting homogeneity could lead to more accurate pricing and valuation of international assets and to an improvement of the efficiency of international fund allocation.
Related Topics
Social Sciences and Humanities Business, Management and Accounting Accounting
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