International Accounting Differences and Their Relation to Share Prices: Evidence from U.K., Australian,and Canadian Firms*

Abstract. We synthesize and extend research exploring differences between U.S. and other countries' Generally Accepted Accounting Principles (GAAP) by investigating whether differences between domestic and U.S. GAAP for U.S.-listed U.K., Australian, and Canadian firms are associated with firms' returns and prices. The accounting differences we investigate include goodwill, asset revaluations, income taxes, pensions, interest capitalization, foreign currency, and extractive industries accounting. We conclude that goodwill is priced as an asset; that asset revaluations, successful efforts accounting for extractive industries, and immediate recognition of foreign currency exchange gains and losses on long-term assets and liabilities are generally uncorrected with the information that investors consider relevant; that U.K., U.S., and Australian tax accounting methods do not recognize ‘enough’ tax expense or liability; and that accrual pension accounting and, in some specifications, interest capitalization add explanatory power beyond Australia's cash-based method. Our findings suggest that the U.S. Securities and Exchange Commission's (SEC's) required GAAP reconciliation reflects information useful to investors for U.K. and Australian firms, and to a more limited extent, for Canadian firms. Résumé. Les auteurs font la synthèse des travaux actuels portant sur l'analyse des différences entre les PCGR des États-Unis et ceux des autres pays; ils poussent plus loin les recherches en s'interrogeant sur la relation possible entre les différences des PCGR de divers pays par rapport à ceux des États-Unis, d'une part, et le rendement et le cours des actions d'entreprises du Royaume-Uni, de l'Australie et du Canada, inscrites en bourse aux États-Unis. Les différences comptables qu'ils étudient ont trait, entre autres, à l'achalandage, aux réévaluations de l'actif, aux impôts sur le bénéfice, aux régimes de retraite, à la capitalisation des intérêts, aux devises et aux méthodes comptables de l'industrie minière. Les auteurs concluent que l'on traite l'achalandage à titre d'élément d'actif; les réévaluations de l'actif, la capitalisation du coût de la recherche fructueuse dans l'industrie minière et la constatation immédiate des gains et pertes de change sur les éléments d'actif et de passif à long terme ne présentent généralement aucune corrélation avec l'information que les investisseurs jugent pertinente; les charges fiscales ou les impôts à payer que permettent de constater les méthodes comptables appliquées aux fins fiscales au Royaume-Uni, aux États-Unis et en Australie ne sont pas «suffisantes»; la comptabilisation de la charge de retraite sur la base des prestations constituées a un pouvoir explicatif supérieur à celui de la méthode basée sur la comptabilité de caisse en vigueur en Australie et, à certains égards, c'est aussi le cas de la capitalisation des intérêts. Les constatations des auteurs laissent croire que le rapprochement des PCGR exigé par la SEC livre de l'information utile aux investisseurs en ce qui a trait aux entreprises du Royaume-Uni, de l'Australie et, dans une moindre mesure, du Canada.     

Discussion of “Accounting Recognition,Moral Hazard,and Communication”

This paper addresses two issues within an agency setting. First, it identifies conditions under which late recognition of an event is preferred to early recognition in the absence of communication of other private information. Second, it demonstrates that the agent's ability to voluntarily disclose his or her private information interacts with the preference for early versus late recognition. Of special interest is the case where early recognition is preferred to late when there is no other source of information, but late recognition is preferred in the presence of a secondary source. I have three types of comments on the paper. The first summarizes the important aspects of the model. The second involves the interpretation of the control problem as accounting recognition. The third contains suggestions regarding how one might bring a valuation perspective into the control setting.     

Discussion of “Aggregate Margin Debt and the Divergence of Price from Accounting Fundamentals”

Burger and Curtis (2017) is an empirical investigation of whether aggregate margin debt correlates with aggregate stock prices and aggregate accounting‐based fundamentals. While the paper convincingly documents a significant relation: aggregate margin debt is higher when aggregate fundamentals‐to‐price ratios are low, it fails to document why. The documented relation could exist because margin traders are the overly exuberant noise traders that push stock prices higher away from fundamental values; or the documented relation could be spurious, and exist because aggregate margin debt rises with aggregate price levels simply because margin loan capacity increases as aggregate price levels increase. With insufficiently granular data (aggregate margin debt measured monthly), the authors are not able to sort out why the relation exists. Thus, interpretation of the findings documented in this paper is difficult.     

Discussion of “Corporate Political Connections and Tax Aggressiveness”

Kim and Zhang (2015) study the relation between corporate political connections and tax aggressiveness. In this discussion, I identify and evaluate three main limitations of their paper: the measurement of political connections, the empirical design, and the possible reasons behind the documented results. I build on these small shortcomings to provide suggestions for further contributions in this area of research.