Accounting Standards and the Valuation of International Securities

Abstract

We explore a new accounting-based valuation model in an international context. An appealing feature of the model is that it produces a measure of firms' fundamental value, "V", that is immune to accounting differences across countries. We explain why this model has the potential to become a "universal translator," that is, a vehicle by which accounting numbers produced under alternative systems can be translated into consistent value estimates. Conceptually, the model operates equally well under any accounting system provided a set of minimal conditions are satisfied. We define these conditions, and evaluate existing systems in the context of these conditions. We also present preliminary evidence on the efficacy of the model in explaining stock prices across countries.

JEL Classification: G12, M41