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European Accounting Review
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An international comparison of
income statement and balance
sheet information: Germany,
Japan and the US
a
Ervin L. Black & John J. White
a
b
Brigham Young University
b
Elmhurst College Center for Business and Economics
Elmhurst IL USA 60126-3296
Published online: 06 Aug 2010.
To cite this article: Ervin L. Black & John J. White (2003) An international comparison
of income statement and balance sheet information: Germany, Japan and the US,
European Accounting Review, 12:1, 29-46, DOI: 10.1080/0963818022000001127
To link to this article: http://dx.doi.org/10.1080/0963818022000001127
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European Accounting Review 2003, 12:1, 29–46
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An international comparison of income
statement and balance sheet information:
Germany, Japan and the US
Ervin L. Black
Brigham Young University
John J. White
Elmhurst College
Manuscript first received: September 2000. Manuscript accepted: March 2002
ABSTRACT
As accounting regulators develop international standards, it is helpful for them to
understand the use of financial statements by investors in different countries. In this
study we compare the value relevance of earnings relative to book value of equity in
Germany, Japan and the US owing to the size of their capital markets and differences in
accounting systems and institutional structures. Accounting in Germany and Japan is
conservative, creditor-oriented and tax-based, with institutional structures that rely on
bank financing and close relationships between capital providers and investee firms,
while the US is used as a basis for comparison.
This study hypothesizes that book values are more value relevant than earnings in
Germany and Japan while earnings are more value relevant in the US, because capital
providers in Germany and Japan are more concerned with balance sheet measures such
as liquidity. Also, accounting characteristics such as conservatism and tax conformity
may lead to greater value relevance of the balance sheet compared to the income
statement in those countries. Our results provide evidence that book value of equity is
more value-relevant than earnings, particularly in Germany, with mixed results for
Japan. In the US, positive earnings are more value relevant than book value of equity,
but not negative earnings.
In summary, we provide evidence concerning the relative value relevance of
summary measures of the balance sheet versus the income statement. Standard-setters
can then look at potential causes for these differences and determine if proposed
accounting standards will have a desired outcome.
Addresses for correspondence
Ervin L. Black, Assistant Professor, 529 TNRB, School of Accounting and Information Systems, Marriott School of Management, Brigham Young University, Provo,
UT 84602, USA. E-mail: erv_black@byu.edu
John J. White, Assistant Professor, Center for Business and Economics, Elmhurst
College, Elmhurst, IL 60126-3296, USA.
Copyright # 2003 European Accounting Association
ISSN 0963-8180 print=1468-4497 online DOI: 10.1080=0963818022000001127
Published by Routledge Journals, Taylor & Francis Ltd on behalf of the EAA
30
European Accounting Review
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1. INTRODUCTION
In this study we compare the value relevance of earnings relative to book
value of equity in Germany, Japan and the US. Previous studies have found
evidence of differences in the value relevance of earnings across countries
(Alford et al., 1993; Ali and Hwang, 2000; Collins et al., 1997; Hall et al.,
1994; Harris et al., 1994). However, these studies have not compared the
value relevance of earnings (a summary income statement measure) to book
value of equity (a summary balance sheet measure). We examine Germany,
Japan and the US owing to the size of their capital markets and differences in
accounting systems and institutional structures. Accounting in Germany and
Japan is conservative, creditor-oriented and tax-based, with institutional structures that rely on bank financing and close relationships between capital
providers and investee firms. The US is used as a basis for comparison
because it has more of an investor focus and companies in the US have been
accused of a focus on the income statement.
Diversity in cultures and political systems across the globe has resulted in
differences in accounting systems. These differences can impede many
different aspects of international economic activity such as stock exchange
listings by firms outside their home countries if investors in those countries
are unable to interpret financial statements prepared using foreign generally
accepted accounting principles (GAAP). For example, US stock exchanges are
bound by strict Securities and Exchange Commission (SEC) regulations that
forbid foreign companies from listing in the United States unless foreign firms
prepare US GAAP financial statements or reconcile their financial statements
to US GAAP.
Currently a movement is under way to reduce the diversity in international
accounting systems and thereby alleviate the resulting problems. US stock
exchanges such as the New York Stock Exchange are lobbying the Securities
and Exchange Commission (SEC) to change its rules, and the SEC has made
some concessions along these lines. In addition, the International Organization of Securities Commissions (IOSCO) has agreed to accept with many
provisos a core set of international standards for cross-border listing for all
member nations since the completion in 1998 of new standards by the
International Accounting Standards Board (IASB). Listed companies in the
European Union are required to prepare consolidated accounts in accordance
with International Accounting Standards (IASs) by 2005. Other major
countries including Japan, Canada and Australia are also supporting this
initiative.
By examining the relative usefulness of accounting data from different
statements – the income statement and balance sheet – our study provides
information to those formulating international accounting standards. As regulators continue the task of standardizing accounting rules internationally they will
have a clearer understanding of the relative usefulness of balance sheet
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An international comparison of Germany, Japan and the US
31
disclosures versus income statement disclosures in the three largest capital
markets: Germany, Japan and the US.
There are two potential causes for a difference in the value relevance of
balance sheet disclosures and income statement disclosures. First, investor
characteristics: investors in some countries, owing to institutional and cultural
factors, prefer one type of information versus another. For example, in
Germany, investors primarily consist of large institutions who are both debt
and equity providers. Thus, in this first case, income statement disclosures,
regardless of the accounting rules, may not provide the information needed by
these investors, such as that provided in the balance sheet disclosures about
the liquidity and solvency of a company. Second, accounting characteristics: a
country’s generally accepted accounting principles may be structured such that
more information relevant to investors is found in the balance sheet than in
the income statement. In this case a change in accounting standards could
affect this relationship.
Standard-setters can only affect the second cause, at least in the short term.
Thus, to the extent that there are differences in the value relevance of
disclosures across countries, regulators need to use caution as they prepare
new standards that are used across many different countries. What may be
better for one country may not have the same impact on users in other
countries. For example, if new accounting standards are implemented that
improve the income statement at the expense of the balance sheet, will
investors be better off if the information that they relied on was principally
found in the balance sheet? While we do not attempt to answer this question,
or to distinguish between these two potential causes, we do provide information about the relative value relevance of summary measures of the balance
sheet versus the income statement. Standard-setters can then look at potential
causes for these differences and determine if proposed accounting standards
will have the desired outcome.
Because of accounting and institutional differences along several dimensions
(Gray, 1988; Nobes, 1983, 1998; Nair and Frank, 1980; Mueller, 1968),
accounting in Germany and Japan differs from that in the US. Thus, we
hypothesize that the relative value relevance of earnings and book value differs
in these three countries. Because of greater creditor orientation, greater conservatism, a higher level of tax conformity, lower diversity of shareholders, and the
greater use of provisions to smooth earnings in Germany and Japan it is
hypothesized that book value of equity exhibits greater value relevance relative
to earnings in Germany and Japan. However, in the US earnings are expected to
be relatively more value relevant than book value of equity.
Our results generally provide support for the hypotheses in Germany and are
robust to different research methods used. However, in Japan the results are less
robust and seem to hold only for firms with negative earnings and=or which are
small. In the US, earnings are shown to be more value relevant for positive
earnings and large firm samples.
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European Accounting Review
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2. HYPOTHESIS DEVELOPMENT
While previous studies have found evidence of differences in the value relevance of
earnings across countries, we focus on three countries in this study: Germany, Japan
and the US. Germany and Japan are used because they have similar corporate
governance structures and accounting systems (Nobes, 1998). The US is used as a
benchmark for comparison purposes because it provides an example of a marketoriented institutional structure based on the Anglo-Saxon=British accounting
model, which differs significantly from that used in Germany and Japan.
German accounting is often cited in accounting literature as a prime example of
the Continental model of accounting development. German accounting is characterized by its basis in code law, its emphasis on financial reporting conformity
with tax accounting, conservatism, and a focus on creditors and the balance sheet.
Government has a significant influence on accounting in Japan. There are three
sources of accounting regulation in Japan: the Commercial Code, the Securities
and Exchange Law, and the tax laws and regulations. The first Commercial Code
was enacted in 1890 in Japan and was heavily influenced by the German
accounting model. It was oriented towards creditors and tax collection. Historically
shareholders were considered insiders while creditors were considered the outsiders (Fujita, 1991) and thus accounting was geared towards creditor protection.
Taxation, creditor interests and the conservative culture in Japan may cause
earnings to be understated. One study, based on data during the 1980s, found that
Japanese earnings were understated by 33.9% relative to US GAAP earnings
(Aron, 1991).1 In Japan, more emphasis is placed on growth in sales and market
share (Radebaugh and Gray, 1997). The use of historical cost and conservatism in
Japanese accounting is similar to German accounting. In fact, Radebaugh and
Gray (1997) state that Japanese accounting is a more extreme form of Germanic
accounting.
In both Germany and Japan there is a system of relationship-oriented capital
providers who are more highly concentrated than those in the US and whose
focus is on long-term business relationships. Table 1 shows the relative
percentages of equity ownership in the US, Germany and Japan. In both Germany
Table 1 Percentage of outstanding corporate equity held by various sectors in Germany,
Japan and the US
Banks
Other financial institutions
Non-financial firms
Individuals
Foreign
Government
US
Germany
Japan
0.2
44.3
15.0
36.3
4.2
0.0
10.3
20.0
42.1
14.6
8.7
4.3
13.3
22.5
31.2
22.4
10.1
0.5
Source: Stephen D. Prowse, ‘Corporate finance and government: an international perspective’,
Southwest Economy, September=October 1997, Federal Reserve Bank of Dallas.
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An international comparison of Germany, Japan and the US
33
and Japan individual ownership of shares is less widespread than it is in the US,
although public ownership is greater in Japan than in Germany.
In Germany, a significant amount of capital is provided by a system of
‘universal banks’. They supply debt and equity capital. As Table 1 shows,
10.3% of German equity is owned by banks compared to only 0.2% in the US.
There is also a large system of cross-holdings wherein companies own stakes in
each other. This is evidenced by the data in Table 1 which show that 42.1% of the
equity in German firms is owned by other non-financial businesses.
The institutional structure in Japan is similar to that of Germany. In Japan,
shareholders tend to be banks, suppliers and customers. These ‘stable shareholders’ are interested in maintaining business ties so shares are held on a longterm basis. There is also a large system of cross-holdings whereby companies
hold stakes in each other, also similar to Germany.
Japanese firms have a heavy reliance on bank debt and, in many cases, banks
may also be the largest shareholders. These banks are referred to as ‘main banks’
in Japan and Table 1 shows that 13.3% of the equity in Japan is held by banks.
Institutional shareholders exhibit influence as associates who hold shares as a
means of doing business. Cooke and Kikuya (1992) state that 75% of the shares
held on the Tokyo Stock Exchange may be held for purposes of long-term
business relationships. The involvement of banks and the long-term nature of
share ownership mean that there is less focus on short-term earnings and also on
conservatism and creditor protection.
In conclusion, there are many similarities between the German and Japanese
institutional structures. Both are characterized by groups of dedicated permanent
owners. Their aims are the perpetuation of the enterprise and the building of the
corporate position as opposed to the maximization of period-by-period profit.
This varies from the US model in that corporate governance in Germany and
Japan is relationship-based while in the US it is market-based (Kester, 1997). The
bank-based system focuses on close, long-term relationships while the marketbased system focuses on short-term returns (Franks and Mayer, 1997).
Book value of equity is a summary measure of the balance sheet – the net of
assets less liabilities available to common shareholders. It is the net (long-term, over
the life of the company) accumulated wealth of the shareholders as measured by
accounting rules. Earnings, on the other hand, are the profits that a firm has earned
during the most recent period and are not necessarily a reflection of long-term
wealth accumulation, but provide information about the company’s recent operations. Thus, in Germany and Japan which have a longer-term focus, we expect that
book value of equity is more value relevant than earnings, while the opposite
relation is expected in the US. Formally stated our research hypotheses are:
H1: The relative value relevance of the book value of equity is greater than
earnings in Germany and Japan.
H2: The relative value relevance of earnings is greater than book value of
equity in the US.
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European Accounting Review
3. RESEARCH METHODOLOGY
Data
The sample of countries selected for this study consists of Germany, Japan and
the US. Firm-specific data for each of these countries is obtained from the Global
Vantage database. Global Vantage is the international version of Compustat.
Earnings before extraordinary items, book value, market value of equity, SIC
code, level of consolidation, accounting standard and fiscal year come from the
Global Vantage database.
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Sample selection criteria
The sample selection criteria employed in this study are as follows. First, firms in
the SIC codes from 4800 to 4999 (Regulated Industries: Communications and
Electric, Gas and Water Utilities) and from 6000 to 6999 (Financial Services) are
excluded.2 Second, only firms reporting accounting data using domestic standards
and full consolidation are used except in the case of Japan where a full consolidation and a parent-only sample are used owing to the small number of firms using
full consolidation. Third, any firm reporting a negative book value is excluded.
Data on level of consolidation, accounting standard, earnings before extraordinary items, book value, market value of equity and total assets are collected
during the thirteen-year period 1986–98. A firm-year is included if all such
variables are available for a given fiscal year.
In addition, outliers are removed using a truncating procedure to reduce the
potential of results being affected by a few observations. Observations, which fall
in the 1st or 99th percentiles, are deleted from the sample for the following
variables: earnings before extraordinary items (earnings), book value of equity,
and market value of equity.
Testing the relative value relevance of earnings and book values
The first hypothesis states that the value relevance of book value of equity is
greater than earnings in Germany and Japan. The second hypothesis states that
earnings are relatively more value relevant than book value of equity in the US.
This implies that the proportion of variation in market value of equity explained
by book value of equity is relatively larger than that explained by earnings in
Germany or Japan, but earnings is relatively more explanatory in the US.
The basic model used to test our hypotheses is equation (1) that has been used
in numerous accounting studies including Barth et al. (1998), Burgstahler and
Dichev (1997) and Collins et al. (1997). This model is particularly useful for our
study because the two independent variables are the summary measures from the
balance sheet and the income statement:
MVEit ¼ b0 þ b1 BVEit þ b2 EARNit þ eit
ð1Þ
An international comparison of Germany, Japan and the US
35
where:
MVEit ¼ Market value of equity at the end of the third month following
the end of fiscal year t, for firm i.
BVEit ¼ Book value of equity at the end of fiscal year t, for firm i.
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EARNit ¼ Earnings before extraordinary items for fiscal year t, for Firm i.
Two statistical methods are used to assess the relative value relevance of
earnings and book value of equity. The first is a methodology derived and used
by Biddle et al. (1995) in assessing the relative information content of
net income, cash flows and net sales for stock returns. This method uses a
Wald chi-square statistic adjusted for heteroskedasticity to compare the ability of
the two independent variables in equation (1) to explain a dependent variable
under the null hypothesis that the explanatory power of both variables is equal.
Thus, rejection of the null indicates that one of the independent variables has
greater explanatory power than the other.3 (The Appendix provides a detailed
explanation of this test statistic.) The variable with greater explanatory power is
derived by comparing R-squares of the two competing independent variables in
the following equations:
MVEit ¼ b0 þ b1 EARNit þ eit
ð1aÞ
MVEit ¼ b0 þ b1 BVEit þ eit
ð1bÞ
These Wald chi-square tests are performed on equation (1) for each of the three
country samples and the R-squares are compared for equations (1a) and (1b) for
each country.
A second method used to test for relative value relevance is to assess the
proportions of variation in the dependent variable, market value of equity, which
are accounted for by book values and earnings, respectively. This method uses
standardized regression coefficients (Johnson et al., 1987) to assess the relative
importance of independent variables in a regression equation. Each variable is
standardized to mean 0 and variance of 1, then estimates the equation (1)
regression using the standardized variables for each country sample. Next, the
coefficients are compared using an F-test.
Hayn (1995) and Burgstahler and Dichev (1997) provide evidence that the
value relevance of earnings is affected by the sign; negative earnings are less
value relevant than positive earnings. We control for this effect by separating each
country sample into positive and negative earnings samples. In addition, we
control for size by separating the sample into quartiles based on size in each
country sample. To test the sensitivity of the results to macroeconomic conditions
and changes in accounting standards tests are also conducted by year.
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European Accounting Review
4. RESULTS
This section discusses the results of the study. It begins with descriptive statistics
and then discusses the results of hypothesis tests.
Descriptive statistics
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We split the samples into four groups: Germany; Japan–Consolidated; Japan–
Parent Only; and the United States. Sample sizes for each of the four samples are
shown in Table 2, Panel A. The German sample has 1,673 firm-year observations,
Japan–Consolidated has 2,187 firm-year observations, Japan–Parent Only has
7,962 firm-year observations and the US has 24,321 firm-year observations.
Table 2 Descriptive statistics for selected variables (in $ millions)
Panel A: Means and standard deviation
Variable
Market value
of equity
Assets
Earnings
Book value
of equity
Country
Germany
N ¼ 1,673
Japan–
Consolidated
N ¼ 2,187
Japan–
Parent Only
N ¼ 7,962
United
States
N ¼ 24,321
706.6
(1,341.6)
1,262.9
(3,021.9)
28.2
(74.6)
309.0
(634.8)
2,503.3
(3,885.1)
4,747.2
(8,705.4)
58.9
(135.8)
1,232.9
(2,035.0)
975.1
(1,150.3)
1,150.2
(1,754.1)
17.5
(28.4)
357.2
(400.8)
1,059.3
(2,418.2)
1,233.7
(3,046.6)
53.4
(139.1)
427.4
(888.4)
Panel B: t-Tests for mean differences across country samples (t-statistic and p-value)
Variable
Country
Germany
vs US
Market value
of equity
Assets
Earnings
Book value
Japan–
Consolidated
vs US
Japan–
Parent Only
vs US
7 9.7 (0.0001)
17.1 (0.0001)
4.2 (0.0001)
0.37 (0.70)
7 12.7 (0.0001)
7 7.2 (0.0001)
18.8 (0.0001)
1.6 (0.12)
18.4 (0.0001)
3.0 (0.0026)
38.5 (0.0001)
9.7 (0.0001)
Notes:
Market value of equity is measured at the end of the third month following the fiscal year end. Assets
is total assets at fiscal year end. Earnings is income before extraordinary items for the fiscal year. Book
value of equity is the book value of common=ordinary equity at fiscal year end. All of these values are
in $ millions.
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An international comparison of Germany, Japan and the US
37
The average market value of equity is much larger for the Japan–Consolidated
sample, as are assets, earnings and book value of equity compared to the US,
Germany and Japan–Parent Only samples.
t-Tests for mean differences (Table 2, Panel B) of Germany, and the two Japan
samples compared to the US show that there is a significant difference in the
average size of these variables across countries, with the exception of earnings in
Germany and the US.
In summary, these tables indicate that there are differences among the four
country groups. For Germany, market value, earnings and book value are smaller
while assets are very similar to the other countries. For Japan–Consolidated, all
are larger with the exception of earnings. The US is larger across all of the three
countries. Japan–Parent Only is smaller. In order to test for any effects of size on
value relevance, the regressions used to test the hypotheses are run after the
sample is split into quartiles based on total assets. These results are reported in
the tables along with the results for the pooled sample and individual year
samples.
Value relevance of book value of equity versus earnings
This section discusses the test results of hypotheses for the relative value
relevance of earnings and book value of equity within countries. Table 3 provides
evidence confirming the hypotheses. For the German sample, the Wald chi-square
statistic is significant at a p-value of 0.0005 and the book value of equity
regression has a higher R-square than the earnings regression. This indicates that
in Germany book value of equity has more value relevance than earnings in
explaining market value of equity.
Similar results are found for the Japanese sample groups; see Table 3. There is
a significant difference in the explanatory power of earnings and book value,
Table 3 Wald w2 test results for relative value relevance
MVEit ¼ b0 þ b1 BVEit þ b2 EARNit þ eit
MVEit ¼ b0 þ b1 EARNit þ eit
ð1Þ
ð1aÞ
MVEit ¼ b0 þ b1 BVEit þ eit
ð1bÞ
Country
R2 Earnings
Equation (1a)
R2 Book value
of equity
Equation (1b)
w2 Test
statistic
Equation (1)
p-Value
Germany
Japan–Consolidated
Japan–Parent Only
United States
0.576
0.571
0.542
0.714
0.700
0.648
0.604
0.654
12.29
3.35
44.85
53.28
0.0005
0.0671
< 0.0001
< 0.0001
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European Accounting Review
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particularly in the Japan–Parent Only sample. For the Japan–Consolidated sample
the difference is only marginally significant at the 0.0671 level. The R-squares for
book value of equity are greater than earnings in both of these samples. Thus, the
evidence supports the hypothesis that in Japan book value of equity is more value
relevant than earnings.
In the US sample, the second hypothesis is supported. Again, the chi-square
statistic is significant at less than a 0.0001 level. However, the R-square for
earnings is greater than that for book value of equity. This indicates that earnings
in the US, during this period of time, are more value relevant than book value of
equity.
Sensitivity analysis
To assess the sensitivity of these results to the test method used we test the two
hypotheses using standardized regression coefficients. These results confirm and
support the results using the Biddle et al. (1995) tests; see Table 4. The
standardized regression coefficients on book value of equity are statistically
greater than the earnings coefficient at less than a 0.0001 level for Germany and
the Japanese groups. In the US, the standardized regression coefficient on
earnings is greater than the coefficient on book value of equity.
Hayn (1995) finds that the value relevance of earnings depends on the sign of
earnings. We separate the groups into positive and negative earnings samples and
perform tests of value relevance on each of these positive and negative earnings
samples within each country group sample. Table 5 provides results of these tests.
The results of these tests support H1 for Germany, but not in all the Japanese
sub-samples. In Germany, book value of equity is significantly more value
relevant than earnings for both the positive and negative earnings samples. It
Table 4 Standardized regression coefficients test for relative value relevance
MVEit ¼ b0 þ b1 BVEit þ b2 EARNit þ eit
ð1Þ
Country
Standardized
regression
coefficient
Earnings
Standardized
regression
coefficient
Book value
of equity
F-Value
(H0: Earnings ¼
Book value of
equity)
p-Value
Germany
Japan–Consolidated
Japan–Parent Only
United States
0.288
0.379
0.362
0.562
0.616
0.541
0.513
0.336
79.38
31.07
73.10
393.50
0.0001
0.0001
0.0001
0.0001
An international comparison of Germany, Japan and the US
39
Table 5 Wald w2 test results for relative value relevance sensitivity analysis: negative and
positive earnings
MVEit ¼ b0 þ b1 BVEit þ b2 EARNit þ eit
MVEit ¼ b0 þ b1 EARNit þ eit
MVEit ¼ b0 þ b1 BVEit þ eit
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Country
N
ð1Þ
ð1aÞ
ð1bÞ
w2 Test
R2 Book
p-Value
R2 Earnings
Equation (1a) value of
statistic
equity
Equation (1)
Equation (1b)
Germany
Positive earnings
Negative earnings
1,424 0.604
249 0.109
0.694
0.801
6.16
23.52
0.0131
< 0.0001
Japan–Consolidated
Positive earnings
Negative earnings
1,849 0.701
338 0.073
0.660
0.429
1.47
23.25
0.2245
< 0.0001
Japan–Parent Only
Positive earnings
Negative earnings
7,363 0.588
599 0.070
0.605
0.423
3.59
20.21
0.0583
< 0.0001
19,726 0.747
4,595 0.096
0.650
0.568
140.02
65.64
< 0.0001
< 0.0001
United States
Positive earnings
Negative earnings
should be noted that the R-square for negative earnings is lower than for positive
earnings in these samples.
In Japan, however, book value of equity is more significant than earnings only
in the negative earnings samples. In the positive earnings samples for the Japan–
Consolidated sample there is no statistical difference in explanatory power
between earnings and book value of equity. For the Japan–Parent Only, positive
earnings sample, book value of equity is only marginally significant and the book
value of equity has a higher R-squared.
In the US sample, only the positive earnings group supports H2; earnings are
more value relevant than book value of equity if earnings are positive. However, if
earnings are negative, book value of equity is more value relevant at significant
levels.
The test results on the negative earnings samples in all countries are most likely
due to the transitory nature of negative earnings. Transitory earnings should not
be very value relevant; thus, book value of equity becomes relatively more
value relevant compared to earnings when earnings are negative with more
transitory components.
Another sensitivity test performed is to check if macroeconomic events impact
the results. We do this by examining each country sample by year. Table 6,
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European Accounting Review
Table 6 Wald w2 test results for relative value relevance sensitivity analysis: yearly tests
MVEit ¼ b0 þ b1 BVEit þ b2 EARNit þ eit
MVEit ¼ b0 þ b1 EARNit þ eit
MVEit ¼ b0 þ b1 BVEit þ eit
R2 Book value
of equity
Equation (1b)
w2 Test
statistic
Equation (1)
p-Value
Panel A: Germany
1986
27
0.867
1987
33
0.889
1988
72
0.649
1989
108
0.848
1990
138
0.511
1991
141
0.631
1992
138
0.541
1993
175
0.354
1994
189
0.508
1995
188
0.447
1996
215
0.523
1997
200
0.658
1998
49
0.652
0.844
0.881
0.845
0.919
0.641
0.734
0.759
0.792
0.645
0.787
0.861
0.841
0.660
1.47
0.17
20.68
31.92
12.03
7.24
15.00
81.61
6.53
37.77
30.75
15.75
0.01
0.225
0.679
< 0.0001
< 0.0001
0.0005
0.0071
0.0001
< 0.0001
0.0106
< 0.0001
< 0.0001
< 0.0001
0.9206
Panel B: Japan–Consolidated
1986
3
0.186
1987
13
0.760
1988
49
0.645
1989
85
0.706
1990
100
0.754
1991
94
0.787
1992
84
0.326
1993
101
0.200
1994
108
0.618
1995
109
0.674
1996
696
0.577
1997
739
0.541
1998
6
0.284
0.608
0.500
0.633
0.649
0.737
0.768
0.707
0.801
0.825
0.861
0.782
0.662
0.739
1.9E29
3.22
0.10
2.47
0.11
0.14
21.49
93.33
18.58
28.63
26.44
6.67
5.84
< 0.0001
0.0728
0.7503
0.1164
0.7435
0.7039
< 0.0001
< 0.0001
< 0.0001
< 0.0001
< 0.0001
0.0098
0.0157
Panel C: Japan–Parent Only
1986
759
0.509
1987
810
0.607
1988
807
0.574
1989
799
0.587
1990
794
0.629
1991
801
0.587
1992
793
0.571
1993
766
0.484
1994
739
0.569
1995
735
0.588
0.617
0.684
0.684
0.671
0.701
0.661
0.746
0.773
0.724
0.780
10.31
6.90
19.51
8.74
9.17
8.32
44.40
77.71
36.32
57.18
0.0013
0.0086
< 0.0001
0.0031
0.0025
0.0039
< 0.0001
< 0.0001
< 0.0001
< 0.0001
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Year
N
R2 Earnings
Equation (1a)
ð1Þ
ð1aÞ
ð1bÞ
An international comparison of Germany, Japan and the US
41
Table 6 (continued )
R2 Earnings
Equation (1a)
R2 Book value
of equity
Equation (1b)
0.795
0.778
n.a.
0.785
0.754
n.a.
0.13
0.39
n.a.
0.7165
0.5322
n.a.
Panel D: United States
1986
1,703
0.731
1987
2,113
0.741
1988
2,049
0.807
1989
1,926
0.813
1990
1,862
0.801
1991
1,866
0.733
1992
1,906
0.782
1993
1,965
0.723
1994
1,956
0.802
1995
1,907
0.694
1996
1,922
0.755
1997
1,763
0.713
1998
1,383
0.615
0.687
0.683
0.684
0.680
0.635
0.683
0.727
0.719
0.725
0.683
0.708
0.690
0.608
2.68
3.66
12.94
20.49
29.79
2.08
5.23
0.03
12.53
0.11
3.67
0.64
0.05
0.1015
0.0557
0.0003
< 0.0001
< 0.0001
0.1490
0.0222
0.8590
0.0004
0.7346
0.0555
0.4240
0.8310
Year
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1996
1997
1998
N
94
63
2
w2 Test
statistic
Equation (1)
p-Value
Panel A, provides results for Germany. Only the years with lower sample size
(1986, 1987 and 1998) are insignificant. In all other years, 1988–97, book value
of equity is more value relevant than earnings.
The results are much more variable for the Japanese sample. In the Japanese
samples, Table 6, Panels B and C, there are some years with insignificant
differences between earnings and book value of equity. However, in all cases,
when there is a significant difference book value of equity has a higher R-square
than earnings; earnings are never statistically more significant than book value of
equity. For the Japan–Consolidated sample from 1987–91, there is no statistical
difference between earnings and book value of equity. However, from 1992–98
book value of equity is significantly more explanatory than earnings for the
Japan–Consolidated samples. In the Japan–Parent Only samples the results are
more robust; book value of equity is more explanatory in all years except 1996
and 1997, in which there is no statistical difference.
In the US (Table 6, Panel D), earnings generally have higher R-squares than the
book value of equity. In yearly samples with significant chi-square statistics
earnings are more value-relevant than book value of equity. These results confirm
the second hypothesis. However, the US results are driven by a few years:
1987–90, 1992, 1994 and 1996 are least significant at a 0.06 level or higher.
As a final sensitivity we examine the effect of size on the results by partitioning
each of the four groups into four size quartiles and performing the Biddle et al.
(1995) tests. These results are found in Table 7.
42
European Accounting Review
Table 7 Wald w2 test results for relative value relevance sensitivity analysis: size quartiles
MVEit ¼ b0 þ b1 BVEit þ b2 EARNit þ eit
MVEit ¼ b0 þ b1 EARNit þ eit
MVEit ¼ b0 þ b1 BVEit þ eit
R2 Earnings
Equation (1a)
R2 Book value
of equity
Equation (1b)
414
415
416
414
0.097
0.144
0.134
0.471
0.237
0.375
0.201
0.581
11.00
36.40
4.33
5.18
0.0009
< 0.0001
0.0375
0.0229
Japan–Consolidated
1st quartile
545
2nd quartile
545
3rd quartile
546
4th quartile
546
0.383
0.413
0.490
0.479
0.267
0.410
0.459
0.505
1.95
0.01
0.39
0.27
0.1629
0.9237
0.5313
0.6005
Japan–Parent
1st quartile
2nd quartile
3rd quartile
4th quartile
1,989
1,990
1,990
1,989
0.120
0.141
0.309
0.453
0.165
0.114
0.184
0.453
11.23
3.10
24.36
0.00
0.0008
0.0782
< 0.0001
0.9906
United States
1st quartile
2nd quartile
3rd quartile
4th quartile
6,047
6,047
6,048
6,048
0.058
0.175
0.335
0.608
0.218
0.231
0.353
0.501
276.25
18.37
1.28
85.55
< 0.0001
< 0.0001
0.2575
< 0.0001
Country
Size quartile
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ð1Þ
ð1aÞ
ð1bÞ
Germany
1st quartile
2nd quartile
3rd quartile
4th quartile
N
w2 Test
statistic
Equation (1)
p-Value
Size does not affect the tests of hypotheses in Germany; book value of equity is
more value relevant than earnings in each of the size quartiles. However, there are
not significant differences in explanatory power in any of the size quartiles for the
Japan–Consolidated samples. In the Japan–Parent Only samples the first quartile
is the only sample that confirms the hypothesis. In the other quartiles the Rsquares are either opposite what is hypothesized or insignificant.
In the US, earnings are only more value relevant than book value of equity for
firms in the fourth quartile. There is no statistical difference for firms in the third
quartile. Book value of equity is more value relevant than earnings for smaller
firms in the first and second quartiles. This is consistent with findings by Black
(1999), which indicates that firms in growth and start-up stages, that are likely to
be small, have limited value relevance of earnings. The US results in the pooled
sample appear to be driven by the large firms.
An international comparison of Germany, Japan and the US
43
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To summarize, the overall results are consistent with the main hypotheses, but
must be tempered by the sensitivity analyses:
1 The results for Germany are robust. Book value of equity is more value
relevant for both positive and negative earnings, in all years with sufficient
sample sizes, and for all quartiles.
2 For Japan the results are much less clear. The Japan–Parent Only sample
results are robust across all years, but seem to be driven by smaller firms. For
the Japan–Consolidated sample, the results show that book value of equity is
more value relevant than earnings only for negative earnings in later years.
Also, when size is factored in there is no significant difference in any of the
size quartiles.
3 In the US the results seem to be driven by positive earnings firms, later years
and large companies. The results are not robust for small firms or for
negative earnings firms.
5. CONCLUSIONS AND IMPLICATIONS
This study theorizes that balance sheet information, as measured by book value of
equity, is more value relevant than income statement information, as measured by
earnings, in Germany and Japan owing to accounting factors and institutional
factors. The accounting factors include a creditor orientation, conservatism, tax
conformity and the use of provisions to smooth earnings. Institutional factors
primarily reflect differences in capital providers, particularly the greater role of
banks as suppliers of both debt and equity capital and the close relation between
suppliers of capital and the firms in which they invest. Our results generally
support this hypothesis, H1, in Germany. For German firms, using various
sensitivity tests, we provide evidence that book value of equity is more value
relevant, as reflected by higher R-squares and standardized regression coefficients. However, in Japan the results are less robust and seem to hold only for
firms with negative earnings and=or which are small.
In the US, earnings are shown to be more value relevant in the pooled, positive
earnings, and large firm samples, supporting H2. The results are unaffected by
test statistics. However, for negative earnings samples and smaller firms book
value of equity appears to be more value relevant than earnings. Thus, the pooled
results are driven by large, positive earnings firms.
These results imply that the value relevance of accounting information is
different across countries (and across type of firm in the US and Japan). Our tests
do not try to distinguish whether one accounting system provides more valuerelevant information than another. What we do show is that, given a set of
accounting standards, cultural norms and regulatory environment the relative
valuation implications of earnings and book value of equity (two summary
measures) differ in these countries. Thus, to the extent that international
accounting standard-setting bodies impact the set of accounting standards used
44
European Accounting Review
in a country they can have some impact on the relative usefulness of accounting
disclosures. It should be noted, however, that standard-setting bodies have little, if
any, control over cultural norms and regulatory environments. Therefore, changing standards, by itself, may not have the desired effect of improving value
relevance if these cultural and regulatory effects are still present.
APPENDIX
Wald chi-square relative information content tests by country
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(1) BE has equal value relevance with ( ¼ R) EARN
Run regressions:
MVEit ¼ b0 þ b1 BVEit þ b2 EARNit þ eit
ð1Þ
(a) Information content of BVE
Define X as an (n 2) matrix with a column of 1s to the left of column BVE.
Define Y as an (n 1) matrix with columns EARN.
Define M as a (2 2) matrix ¼ Y0Y 7 Y0X(X0X)1X0Y, with elements mij.
Set BVE ¼ m11*b1^2 þ m22*b2^2 þ 2*m12*b1*b2
(b) Information content of EARN
Define X as an (n 2) matrix with a column of 1s to the left of columns
for EARN.
Define Y as an (n 1) matrix with columns BVE.
Define M as a (2 2) matrix ¼ Y0Y 7 Y0X(X0X)1X0Y, with elements mij.
Set EARN ¼ m11*b1^2 þ m22*b2^2 þ 2*m12*b1*b2
(c) Use Wald chi-square test to test the following restrictions:
BVE ¼ R EARN
If a significant chi-square value is obtained then compare R2 from the
following regressions to determine which variable has the greatest value
relevance:
MVEit ¼ b0 þ b1 EARNit þ eit
ð1aÞ
MVEit ¼ b0 þ b1 BVEit þ eit
ð1bÞ
NOTES
1 It should be noted that, more recently, Japanese companies have been covering
up disasters by realizing capital gains on sale of old assets. This may cause earnings
to be overstated, but would similarly reduce the value relevance of the net income
disclosure.
2 These firms are excluded owing to the unique nature of their financial statements. For
example, regulated industries earnings are in many cases controlled, as are other
variables in the financial statements.
An international comparison of Germany, Japan and the US
45
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3 Tests of the relative value-relevance hypotheses are performed using Wald chi-square
tests on the significance of the squared coefficients. This methodology is appropriate
asymptotically when the disturbances could be heteroskedastic and assumes that the
error terms, ei, from equations (1a) and (1b) are vectors of unobserved random
disturbances that are normally distributed with mean zero and unknown covariance
matrix. Two different matrices represent subsets of predictor variables; each consists of a
subset of columns of the independent variables. The object is to test whether one subset
of predictor variables is significantly better than the other for the purpose of explaining
the dependent variable, MVE.
In general when comparing the quality of two sets of predictors, X1 and X2, the
matrix Y1 consists of the columns of X that are not in X1, and similarly for Y2. B1 and B2
are subsets (1 and 2, above) of regression coefficients for Y1 and Y2, respectively. Thus,
the null hypothesis becomes in general form:
H0 : B01 Y10 ½In X1 ðX10 X1 Þ1 X10 Y1 B1 ¼ B02 Y20 ½In X2 ðX20 X2 Þ1 X20 Y2 B2
ð2Þ
This non-linear hypothesis is of quadratic form in the regression coefficients. The lefthand side of the hypothesis represents the bias due to omitting Y1 from the regression,
keeping only X1, which is a quadratic form in the omitted regression coefficients B1. The
right-hand side represents the bias when Y2 is omitted. The test result is then computed
using the estimated coefficients and their heteroskedasticity-adjusted variance–covariance matrix. The Wald test is asymptotically valid and is appropriate when specific
hypotheses are prespecified: as is the case in this paper.
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