1992 Reports

A comparison of relations between security market prices, returns and accounting measures in Japan and the United States

Hall, Charles; Harris, Trevor; Hamao, Yasushi

Extensive research and discussion has occurred over the last two decades relating to the relevance of accounting differences in the valuation of securities in international capital markets. Yet little empirical evidence exists which evaluates how the accounting measures in Japan are associated with stock prices or returns, especially over periods other than short-event windows of a few days, weeks or months. We see use of P/E relatives in discussions of cost of capital and broad international comparisons. For such evaluations to be made usefully we should expect fundamental associations between the accounting and stock market measures to be equivalent across the countries, subject to accounting differences. That is, if equivalent basic associations do not exist then it is not clear what it means to make such international comparisons. This paper evaluates such associations in Japan and compares them to a sample of firms in the United States using a methodology recently developed in Easton and Harris and Easton, Harris and Ohlson and considered for Germany in Harris and Lang.