Discussion of Analyzing the German Accounting Triad with an Enhanced Multifactor Model - 'Accounting Premium' for IAS/IFRS and U.S. GAAP Vis-À-Vis German GAAP

Ernstberger and Vogler (2007) employ the concurrent use of three distinct accounting standard regimes (German GAAP; U.S. GAAP; and IAS/IFRS GAAP) in Germany as a foundation for evaluating the relation between accounting standard regime and equity return attributes. They find that firms using U.S. or IAS/IFRS GAAP have higher Betas but yield lower returns (cost of capital) relative to firms employing German GAAP. They also find that portfolios designed to isolate the return impacts of U.S. and IAS/IFRS GAAP relative to German GAAP are priced in a risk-factor like fashion. In this discussion I suggest that a good bit of this empirical evidence is problematic. I also discuss the implausibility of information quality being priced in a Fama and French (1992) factor-like fashion. Finally, I introduce the importance of conditioning analyses of the relation between firm-level information quality and equity market return (cost of capital) on the degree to which the shareholder bases of firms hold diversified portfolios