Market Size: The Unheralded Driver of Value Relevance Differences in Cross-Country Studies?

Abstract

This paper sheds light on the sensitivity of findings in comparative (international) value relevance studies in regards to two fundamental methodological choices: We argue (and find) that both model choice (the regression vs. the portfolio returns specification) and return window choice are not arbitrary. They have an impact on country rankings and the significance of cross-country differences in comparative designs. Findings with respect to return window choice are likely to be explained by comparative international value relevance studies not only testing for the relevance and reliability of accounting information, but also jointly testing the hypothesis that accounting information is processed similarly across countries. Our results indicate that this joint hypothesis does not always hold and that, thus, previous comparative studies might have overstated accounting quality differences across countries. The findings are based on a treatment sample of 56,000 firm-year observations from 12 countries and from 12 matched U.S. control samples, with observations from 1988 and 2007, respectively.