DO ACCOUNTING STANDARDS EXPLAIN DIFFERENCES IN EARNINGS-PRICE RATIOS OF JAPANESE AND U.S. FIRMS?

Abstract

This study examines the variation in earnings-price ratios across Japanese and U.S.
firms. Previous literature documents that Japanese firms have consistently lower earnings-
price ratios than U.S. firms. The differences in earnings-price ratios have been primarily
attributed to differences in Japanese and U.S. accounting standards. However, Aron
(1991)and French and Poterba (1991) provided a conflicting evidence on the argument of
accounting standards that are the only cause of the differences in earnings-price ratios The
objective of this study is to examine the issue that Japanese firms lower earnings price
ratios is attributable to the differences in the accounting standards..
The results show that adjusting Japanese earnings does not entirely eliminate the
differences in the earnings-price ratios between Japanese and U.S. firms. On the average,
the accounting standard differences account for 52 percent of the differences in the
average earnings-price ratios of Japanese and U.S. firms.
Controlling for differences in accounting standards does not eliminate the differences in
the earnings-price ratios of the Japanese and U.S. firms. It is appropriate to conclude that
although differences in accounting standards occur between Japanese and U.S. firms, it is
not the only factor that contributes to the differences in the earnings-price ratios of
Japanese and U.S. firms

Keywords: Earnings price ratio, Japanese earnings adjustment, U.S. firms, Japanese firms.