The Relation of Firm Market Values with Book Values and Residual Accounting Earnings in Six Asian Countries

Abstract

We examine the relation between stock prices and accounting numbers across six Asian countries: Indonesia, South Korea, Malaysia, the Philippines, Taiwan, and Thailand. Accounting practice in the six countries differs in faithfulness to clean surplus accounting and in bias (conservatism). We address two questions. First, are there systematic differences across the countries in the value relevance of accounting? Second, are there systematic differences in the incremental and relative information content of book values and abnormal (residual) earnings per share (REPS) across the countries? We also examine whether differences are related to accounting differences. We find differences across the six countries in the value relevance of accounting numbers. Explanatory power for Taiwan and Malaysia is relatively low while that for Korea and the Philippines is relatively high. Second, we find book value to have high explanatory power in the Philippines and Korea but little in Taiwan. REPS had less explanatory power than book value (and less than EPS) in all six countries.

JEL Classification: M41, G12