A comparative study of the usefulness of accounting systems (Japan)

The main purpose of this study is to test whether the U.S. accounting system is more useful than other accounting systems in estimating firms' value by using a new method of comparing alternative accounting systems. This method examines whether one accounting system is superior to another accounting system with its ability to correctly measure a firm's worth, represented by the prevailing market price of its stock. Specifically, the analysis employs accounting-based valuation models developed by Ohlson (1995) and extended by Penman (1997). Two sets of sample are used in this study. The first sample consists of non-U.S. firms that report in Form 20F. These firms usually provide two different financial statements, one by their ‘home’ Generally Accepted Accounting Principles (GAAP) and the other by U.S. GAAP. The second sample consists of Japanese firms that are listed on at least one of the stock exchanges in Japan and that prepare consolidated financial statements on Japanese GAAP. For this sample, attempts are made to translate Japanese-GAAP based numbers to U.S. GAAP-based numbers. This study applies accounting-based valuation models by using these two sets of accounting numbers. The valuation error, defined as the difference between the market value of the firm and its intrinsic values calculated by the valuation models, serves as the benchmark of the usefulness of the accounting system for its users in their decision making. The findings of this study, using companies whose Form 20-F are based on International Accounting Standards (IAS) and/or Australian GAAP, suggest that both IAS and Australian GAAP have smaller bias in valuation than U.S. GAAP. However, the valuation errors are more widely dispersed with non-U.S. GAAPs. This is consistent with the SEC's call for tighter implementation of IAS. Results from the second sample suggest that translating Japanese GAAP into U.S. GAAP increases the usefulness of accounting numbers, which supports ongoing restructuring of Japanese accounting standards.