European Differences in the Valuation of Earnings and Book Value : Regulation Effects or Industry Effects?

This paper uses a valuation framework for a sample of firms from four European countries (France, Germany, Netherlands, and United Kingdom) to examine how are their accounting income and book value of equity perceived by the respective capital markets after taking into account industry effects. The empirical model, based on Ohlson (1995), posits relationship between income, and book value of equity and market prices. In our tests we take into account the time series properties (linear information dynamics) of the accounting variables posited in the Ohlson model and, in a separate model, we test for the accrual adjustments in earnings. Consistently with previous researchers we find that both earnings and book value of equity have valuation implications, that there are significant country specific differences in the valuation multiples but the differences are substantially reduced when we take into account industry effects