Market perception of foreign financial reports: Differential earnings response coefficients between U.S. and foreign GAAP

Market Perception of Foreign Financial Reports: Differential Earnings Response Coeffhzients Between U.S. and Foreign GAAP

Ruth W. Epps Joon-Whan Oh

This study investigates the relative informativeness of foreign GAAP earnings compared to U.S. GAAP earnings by modeling the degree of market response associated with foreign firms’ financial reports as a function of the quality of the earnings signal. U.S. stock markets perceive the quality offoreign GAAP earnings to be different from U.S. GAAP earnings. The results of the study indicate thatforeign macro GAAPproduces lower quality earnings signals than U.S. GAAP, while foreign micro GAAP produces higher quality earnings signals than U.S. GAAP. Key Words: earnings response coefficients; foreign,financial earnings signals; micro/macro GAAP.

reports; capital markets; quality

INTRODUCTION Daimler-Benz AG reported a profit of $97 million for the first half of 1993 under the German accounting rules. After it restated the results under the U.S. accounting rules to become the first German company to list its shares on the New York Stock Exchange, it reported a loss of $548 million for the same reporting period (Duffy and Murray 1994). The different earnings figures reported under the two sets of accounting standards are an example of one of many transnational financial reporting issues which have drawn attention from both the financial and

Ruth W. Epps l Associate Professor and Chairman, Department of Accounting, Virginia Commonwealth University, School of Business, 1015 Floyd Avenue, Richmond, VA 23284-4000; e-mail: [email protected]. Joon-Whan Oh l Assistant Professor of Accounting, Hongik University, School of Business Management, 34 Shinan-ri, Chochiwon-up, Chungnam, Korea, 339-800. Journal of International Accounting, Copyright 0 1997 by JAI Press, Inc.

Auditing & Taxation, 6( 1):49-74 All rights of reproduction

ISSN: 1061-9518 in any form reserved.

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academic communities. Transnational financial reporting addresses the issue of cross-national differences in accounting standards, auditing practices, and disclosure requirements. As the world economy moves toward globalization and cross-border financial activities increase, considerable effort is being made to harmonize accounting rules among nations. The European Union (EU) recently adopted a mutual recognition approach where financial statements prepared in one member country are accepted in all other member countries for cross-border listing. Similarly, the U.S. and Canada have a multijurisdictional disclosure system (MJDS) that recognizes the accounting rules of each other. The MJDS agreement between the U.S. and Canada permits the mutual listing of certain large size companies by the SEC and Canada’s Ontario Securities Commission through the filing of the same registration documents as in the home country. To respond to the increased demand for cross-national stock listings, the U.S. Securities Exchanges Commission (SEC) is considering similar arrangements with the regulatory bodies of other nations. The SEC has other options such as the full recognition of the International Accounting Standards (IAS) set by the International Accounting Standards Committee (IASC) or the waiver of the U.S. requirement for “world class” stocks. “World Class” stocks are stocks of international corporations that are listed internationally and whose market capitalization is greater than $1 billion (McQueen 1993). The SEC, however, faces a dilemma. It must choose between allowing flexible rules to facilitate foreign listings and maintaining stringent rules to protect domestic investors. Currently, the SEC requires foreign firms to file their financial statements under the integrated disclosure system (IDS) adopted in 1982. Under the IDS, foreign firms face less stringent reporting requirements than domestic firms for filing date, disclosure level, and generally accepted accounting principles (GAAP) application. Despite the IDS, the U.S. reporting requirements are still considered among the most stringent listing and filing requirements of the developed nations and are viewed as a barrier to the internationalization of the U.S. stock markets. However, SEC Chairman Breeden testified that further loosening of the reporting standards for foreign firms “would seriously disadvantage U.S. firms in their home market.” Furthermore, it could lead U.S. investors to “select a foreign company’s stock...only to discover later that differences in accounting or auditing standards made the foreign stock look better” (Salwen 1991, 8). Whether U.S. investors can effectively cope with different accounting rules across nations can be empirically investigated. If U.S. investors possess such coping mechanisms or “Multiple Principles Capabilities” (MPC), then investors will not be misled by the accounting differences between the U.S. and other countries (Choi and Levich 1990, 4). As a result, the SEC could then justify its adoption of more flexible accounting rules for foreign firms’ listings and filings.

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The present study examines how the U.S. stock markets [New York Stock Exchanges, American Stock Exchanges, and National Association of Securities Dealers Automated Quotation System] respond to foreign firms’ financial reporting.’ Specifically, it examines the U.S. stock markets’ perceptions of the quality of foreign GAAP earnings compared to U.S. GAAP earnings. Evidence of the perceived quality of foreign GAAP earnings has an accounting policy implication regarding the transnational financial reporting. No significant quality difference between foreign and U.S. GAAP earnings implies that the SEC may take a more liberal approach toward the accounting requirements for foreign firms.

PREVIOUS RESEARCH Several studies exploring Lev’s (1989) notion of quality of earnings examine the usefulness of foreign financial reports. Some studies (McQueen 1993; Amir et al., 1993) evaluate the value-relevance of the SEC Form 20F filings, reporting that the disclosure of 20F reconciliations (U.S. GAAP earnings) carries little information to investors. Other studies (Meek 1991; Pope and Inyangete 1992; Frost and Pownall 1994) examine the stock price reaction to foreign firms’ earnings disclosures in the U.S. and other countries. These studies find that some factors, such as firm size, timeliness, and trading frequency, are associated with the cross-sectional variability of returns around earnings announcements by foreign firms. The studies conclude that the usefulness of earnings is very modest in an international context and call for the development of a model that controls for the financial reporting environments influencing the relation between returns and earnings. Hence, the present study utilizes a model which examines quality perception of earnings under different accounting rules while controlling for firms’ information environments.

Accounting Systems Classification The task of understanding foreign financial reporting requires an understanding of foreign accounting rules, as well as how specific national accounting systems differ from one another. This understanding is enhanced through the classification of national accounting systems by fundamental reporting characteristics (Doupnik and Salter 1993). The present study uses the accounting hierarchial classification system (Nobes and Parker 1981; Nobes 1983) which is based upon national environmental factors and accounting practices (Mueller 1967, 1968; Seidler 1967; AAA 1977), and empirical studies developed through statistical analysis of data on financial reporting practices (DaCosta et al., 1978; Nair and Frank 1980; Berry 1987; Doupnik and Salter 1993). These studies, which used factor analysis and

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cluster analysis, hypothesize that the world-wide accounting systems of developed countries can be classified into two major groups of countries, termed “micro” and “macro” (Mueller 1967; Nobes 1983; Doupnik and Salter 1993). The hierarchy indicates the cluster (family or class-micro/macro) in which the accounting practices are similar. The micro group includes those countries that rely primarily on practitioners and other nonlegislative sources to develop accounting principles. This group includes all British Commonwealth, the U.S., the Netherlands, and their related colonies and former colonies, It also includes Taiwan, which has strong U. S. ties, and Luxembourg, which is a close neighbor to the Netherlands. The macro group consists of countries that traditionally have relied on legislative fiat for accounting matters. This group includes all continental European countries (excluding Luxembourg and the Netherlands) and countries drawing their law from this continental base, namely countries in Latin America, the Arab world, and nonBritish Asia. (Doupnik and Salter 1993.51)

RESEARCH

METHOD

Research Question The present study examines whether U.S. investors perceive the quality of foreign GAAP earnings to be different from that of U.S. GAAP earnings. The study addresses the research question by examining the factors that may contribute to differences in the earnings-return relation as described by Meek (1991), Pope and Inyangete (1992), and Frost and Pownall (1994). This examination focuses on how differences in the perceived quality of earnings figures affect the investors’ stock valuation. Perceived quality, as used in the present study, relates to the informativeness of foreign GAAP earnings to that of U.S. GAAP earnings when U.S. investors assess firms’ future cash flows and dividend-paying ability. Recent survey studies show that U.S. investors have an effective coping mechanism to deal with the differences in U.S. and foreign GAAP earnings, even though investors respond that the accounting differences across nations affect their investment decisions (Choi and Levich 1990). An empirical approach to investigating the extent of the effect of such coping mechanisms on the investment decision is to examine the information dissemination process regarding the foreign GAAP earnings. If U.S. investors have trouble interpreting earnings reported under other countries’ GAAPs, then they will have difficulty assessing the future cash flows and dividend-paying ability of foreign firms. This prediction difficulty, caused by the quality (informativeness) of the foreign GAAP earnings, is expected to be reflected in security return (market reaction). Consequently, the market reaction associated with a release of the for-

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eign GAAP earnings contains the market’s quality perception on the particular foreign GAAP earnings information. Most foreign firms listed on U.S. stock exchanges announce their preliminary earnings (PEA) in the U.S. based on their domicile country GAAP. However, most Japanese firms announce their earnings based on U.S. GAAP. Using the PEA reporting event, the present study models the degree of price adjustments (earnings response coefficients) associated with unexpected earnings as a function of the degree of informativeness of the foreign GAAP earnings. The present study constructs an experimental design to test earnings response coefficients (ERCs) differences between foreign and U.S. GAAP earnings. The underlining efficient market hypothesis in the study is that the market instantly and efficiently impounds all discernible information into the market price of securities. Empirical Model and Hypothesis For U.S. investors, the information content of foreign GAAP earnings may not be equal to that of U.S. GAAP earnings. Different measurement rules used by nations may cause investors to have difficulty interpreting foreign GAAP earnings and assessing the future cash flows and dividend-paying ability of a firm. Because of the perceived low degree of informativeness of the foreign GAAP earnings, U.S. investors may place less weight on foreign GAAP earnings, resulting in lower earnings response coefficients.2 The present study posits that the perceived quality of the foreign GAAP earnings information signal is inversely related to the magnitude of the earnings response coefficients. To test the effect of earnings quality perception on the earnings response coefficients, the present study uses a cross-sectional regression model developed by Holthausen and Verrecchia (1988) and Collins and Salatka (1993). (See Appendix 1.)Foreign firms are classified into micro/macro GAAP systems as suggested by Doupnik and Salter’s 1993. To control for a firm’s information environment with overseas operation, the sample firms are classified into multinational and nonmultinational firms. The regression model estimates the individual coefficient parameters that are combined to form earnings response coefficients for treatment (foreign) and control (U.S.) firms. Foreign firms include Canadian firms. The information environment and GAAPs of the U.S. and Canada are so similar that previous information content studies often exclude Canadian firms from the sample. The matching U.S. firms (control group) are selected by four digit industry code (SIC) and firm size (total sales). The selection criteria of similar industry and size are an attempt to control for differences in information environment.3 Most foreign firms in the sample are multinational. To control for multinational environment, U.S. multinational firms are selected based on the size of overseas sales. A minimum of ten percent of total sales must be overseas sales.4

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The experimental design estimates the covariance between the indicator variables and dependent variable, and tests differences in combinations of coefficients that provide the average ERCs for a particular firm/GAAP type. The matching design allows inferences to be drawn about the informativeness of the preliminary earnings announcements under U.S. GAAP and foreign GAAP. Thus, the hypothesis, stated in null form, is: HO:

There is no ERC difference earnings.

between foreign GAAP earnings and U.S. GAAP

The hypothesis is tested by an analysis of covariance. The regression coefficients depend on the values of the indicator variables. There are three indicator variables which identify three possible group memberships: the first and second variables classify foreign GAAP earnings into micro and macro groups and the third variable distinguishes between multinational and nonmultinational firms. For U.S. control firms, the ERCs are estimated by b, (nonmultinational firms) or bl + b4 (multinational firms) [See Appendix l] since the micro and macro group indicator variables are the same (Doupnik and Salter 1993). For the treatment nonmultinational foreign firms, the ERCs are estimated by either b, + 62 (micro GAAP system) or bl + b3 (macro GAAP system). For the treatment multinational foreign firms, the ERCs are estimated by either bl + b2 + b4 + b5 (micro GAAP system) or b, + b3 + b, + bb (macro GAAP system). Sample Data The sample consists of firms whose common stock shares or American Depositary Receipts (ADRs)” were traded on the New York Stock Exchanges (NYSE), the American Stock Exchanges(AMEX), and the National Association of Securities Dealers Automated Quotation System (NASDAQ). The sample firms were identified using the 1994 COMPUSTAT data base and the annual editions of each stock exchange Fact Book. The sample firms had to meet the following selection criteria: 1. Have security return data available on CRSP tape for the sample period (1990-1993), 2. Have preliminary earnings announcements (PEA) available from the Wall Street Journal Index. 3. Have quarterly or semi-annual earnings forecasts available from the Value Line Investment Survey. In the present study foreign firms are defined as the firms incorporated outside the U.S. This definition is consistent with the definition of foreign firm used

Perception of Foreign Financial Reports

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by the Compustat data base and the Fact Books. Fifty-nine foreign firms comprise the treatment group (See Appendix 3 for the profile of each firm). A total of 118 U.S. firms comprise the control group which consists of fifty-nine U.S. nonmultinational firms and fifty-nine multinational firms (Appendix 3). Preliminary

Earnings Announcement

Dates

Preliminary earnings announcement dates were available from the Wall Street Journal Index (WSJI). The WSJI dates were verified by the specific issue of the Wall Street Journal (WSJ) where the announcements were published in the “Digest of Earnings” section. The WSJI date may not be the day that a firm announces earnings to the public. For example, if a firm announces its earnings after the final deadline of a specific WSJ issue, then the announcement appears in the following day’s issue. Furthermore, foreign firms may have a reporting event whose announcement is made in the home country but does not coincide with the U.S. announcement.6 The ambiguity for actual public access dates is the reason that the present study uses a two-day return window covering the announcement date (t = 0) and one day before the announcement date (t = -1). Most event studies recommend the use of a multiple day event rather than a one-day event in situations where it is unclear on which day the information reaches the market (Peterson 1989; Dann 1981). Return and Forecast Data Return data were from the 1994 version of daily CRSP (Center for Research in Security Prices) tape. Foreign firms issue their security, called American Depositary Receipt, by entering into an agreement with a U.S. bank. International investment risks such as exchange and sovereign risks still exist for ADR. However, ADR holders can avoid some problems of holding foreign stocks because the depositary bank handles matters such as cash dividends, right offerings, and stock splits and dividends. As a surrogate for the unexpected earnings, financial analysts’ forecast errors were used. Capital market research supports the notion that analysts’ forecast errors are related to security return (Collins and Salatka 1993). Capital market research also suggests that differences in the informativeness or quality of eamings signal can be effectively captured by the magnitude of the analysts’ forecast error for the relatively short return windows (around PEA events).7 Forecast and actual earnings per share (EPS) data used in the present study were obtained from the Value Line Investment Survey, a weekly publication providing quarterly EPS forecasts per year for the covered companies.

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RESULTSOFTHESTUDY

Match Between Treatment and Control Groups The control group of U.S. firms selected approximated the size and SIC code of foreign treatment firms. Table 1 presents the distribution of pair-wise industry matches. Because most foreign firms are multinationals, the present study encountered more difficulty in matching U.S. not-multinationals than in matching U.S. multinationals. Foreign firms were matched with forty-three U.S. multinationals and thirty U.S. nonmultinationals. Table 2 presents summary statistics on firms’ total sales and overseas sales. As with industry matching, matching by size was more difficult for nonmultinationals. The pair-wise size comparison shown in Table 2 reveals shows no significant mean difference between U.S. multinational firms and foreign firms. However, the pair-wise size comparison between foreign firms and U.S. multinational firms and between foreign firms and U.S. nonmultinational firms show significant mean differences. nonmultinational U.S. firms are much smaller in size than foreign firms or U.S. multinational firms. TABLE 1 Distribution

of Pair-Wise

Multincrfional 2.digif

Industry

Matches Non-Multinotionnl

Firms

j-digit

4-digit

2.digit

.3-digit murches

Firms 4digit matches

SIC Cod<>

mnrche.s

mufche.s

mrtrchrs

mczwhes

10

0

0

2

0

0

2

13

0

0

2

0

0

2

20

1

0

3

2

1

1

24

I

0

0

0

0

I

26

0

0

I

0

0

I

27

0

0

1

0

0

I

28

1

0

7

4

I

3 4

29

0

0

4

0

0

33

0

0

3

1

0

2

34

I

0

0

1

0

0

35

0

0

3

1

2

0

36

4

I

5

4

I

5

37

0

1

2

0

1

2

38

0

0

3

2

0

I

45

0

1

I

0

0

2

48

0

0

1

0

0

1

49

0

1

2

0

2

I

61

0

0

1

0

0

I

73

2

0

2

4

0

0

78

1

1

0

I

1

0

Total

II

5

43 = 59

20

9

30 = 59

57

Perception of Foreign Financial Reports TABLE 2 Summary Statistics on Total Sales and Overseas Sales Paired-Comparison Mf?LZn

Std. DEW

FO/USM

FOR/SD

USM/U.SD

Firm Size: Treatment FO

$4304.30’

$12231.33 - 1.69’

Control USM

$5914.84

$18420.11

Control USD

$1673.28

$4415.54

Foreign Sales %: Treatment FO

0.15

0.29

Control USM

0.14

0.22

0.093

-0.65 0.52

Control USD 0.01 0.04 Notes: 1 - Millions of dollars (unit); 2 T value; 3 Probability > ITI. FO - Foreign firms; USM U.S. multinationals; USD - U.S. nonmultinationals.

4.74 0.00

11.79 0.00

5.32 0.00

13.93 0.00

As expected, overseas sales percentage, which is the basis of distinguishing multinational firms from nonmultinational firms, shows no significant difference between U.S. multinationals and foreign firms. However, there are significant differences between foreign firms and U.S. multinationals and foreign firms and U.S. nonmultinational firms. Comparison

of Prediction Errors and Forecast Errors

The sample consists of 59 foreign treatment firms and 118 U.S. matched-pair control firms and the sample period is from 1989 to 1993, resulting in the possibility of 720 fourth quarter (or second half) earnings announcements. Missing information on earnings forecasts, announcement dates, and return data reduces the sample observations to 596 earnings announcements. The influential data analysis suggested by Belsley et al. (1980) identified 6 observations as outliers, resulting in final sample observations of 590 earnings announcements.s Table 3 presents the summary results of analysts’ earnings forecast errors (FE) and two-day prediction errors (PE). The FE is scaled by the stock price which is in effect two days before the earnings announcement. This scaling is done to adjust for any prior scale differences between FE and PE. Table 3 includes the means, standard deviations, and paired-comparisons for earnings forecast errors and prediction errors of the three groups: (a) U.S. nonmultinational firms, (b) U.S. multinational firms, and (c) foreign firms. Since there are only eighteen observations for foreign nonmultinational firms, both foreign nonmultinational and multinational firms are grouped together for the analysis of pair-wise comparisons.

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TABLE 3 of Forecast Errors and Prediction Errors for Control and Treatment Groups

M6XUl

Std. Dev.

US/SD-USM

USD-FO

USM-FO

PE: USD

-0.0017

0.0246

-0.0012 (0.4241)

USM

-0.0005

0.0259

FO

-0.0012

0.0269

-0.0005 (0.7407) 0.0007 (0.6585)

FE: USD

-0.0023

0.0203

USM

-0.0020

0.0128

-0.0003 (0.7179) 0.0025 (0.1535)

FO

-0.0048

0.0366

0.0028 (0.0779

Notes:

FE Earnings forecast errors scaled by stock price two days before the earnings announcement. PE Two-day cumulative abnormal returns from the market model estimated over 201 trading days. p-value - probability for two-tailed tests for significant difference in means. FO - Foreign firms; USM U.S. multinationals; USD U.S. nonmultinationals.

There are no significant differences among the three groups for the two-day prediction errors. All p-values of the pair-wise comparisons show no significant mean differences between groups. Accordingly, the analysis focuses on analysts’ earnings forecasts errors which show weak evidence of mean differences among groups, especially between U.S. firms (both multinational and nonmultinational) and foreign firms. The mean difference between U.S. multinationals and nonmultinationals is -0.0003, which is not significant at p = 0.72. This result supports the view that analysts predict the earnings of U.S. multinational firms as accurately as those of nonmultinational firms, although multinationals have large earnings adjustments related to foreign operation (i.e., foreign currency translation). This result is consistent with previous research findings, which show greater accuracy in earnings forecasts for U.S. multinational (Riveria 1989; Collins ans Salakta 1993). The mean difference between U.S. nonmultinationals and foreign firms is 0.0025, which is marginally significant at p = 0.15. For the U.S. multinationals and foreign firms, the mean difference is 0.0028, which is significant at p = 0.08. These results are consistent with the notion that there is greater difficulty in predicting earnings for foreign firms than for U.S. firms. Analysis of Earnings Response Coeffkients Table 4 presents the individual coefficients estimates of the cross-sectional regression model. The primary interest of the analysis is with the combined coef-

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TABLE 4 Cross-Sectional Regression Results Parameter

Coefficients

t-value

bo

0.025

1.11

bl

0.259

3.12

bz

1.774

1.82

b3

-1.355

-0.57

“4

-0.090

-0.58

“5

-1.524

-1.55

b,

-1.220

0.51

Notes:

Adjusted R2: 0.108. F-value: 11.160 0, < O.OoOl). Number of observations: 590.

ficients to form the ERC estimates for control groups and the treatment groups. Accordingly, the sign and significance of individual coefficients are presented. As is common in event studies, the explanatory power of the regression model is low (adjusted R2 of 10.8 percent). This finding is consistent with the view that unexpected earnings information has modest usefulness in the return/ earnings relation.’ However, the F-value for the model is 11.160, which is significant at p = 0.0001. Hence, the challenge for the present research is to analyze the market’s perception of this information because of its usefulness to the return/ earnings relation, even though it is a modest relationship. Table 5 presents summary statistics of the indicator variables and the combined coefficients forming relevant contrasts between the various firms’ GAAP types specified in the model. The nondirectional F-statistic is employed to test the null hypothesis of no ERC difference between control and treatment groups. The associated p-values are presented to indicate significance of ERC differences between groups.

Foreig4LJ.S.

GAAP Comparisons

Since most of the foreign firms in the treatment group are multinationals, a primary concern of the analysis relates to the contrasts between foreign multinationals and U.S. multinationals.‘” For foreign micro multinationals and U.S. multinationals, the ERC difference (b2 + b,) is 0.25 with an F-value of 12.69, which is highly significant at p = 0.0001. The ERC difference for nonmultinationals is (b2) 1.77 with an F-value of 13.27, which is highly significant at p = 0.0001. The positive differences are consistent with the view that even if the unexpected earnings are the same, U.S. markets are more responsive (have more price adjustments) to foreign micro GAAP earnings than to U.S. GAAP earnings. In other words, the earnings information produced under foreign micro GAAP is perceived by inves-

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TABLE 5 Summary Results of ERC Difference

GAAP Comparisons: Foreign micro multi

1

0

bl+b2+b4+b5=0.419

USM Foreign macro multi

0 0

0

bl+b4=0.169 b 1+b3+b4+b6=0.034

USM Foreign micro dom

0 1

0 0

0

USD Foreign macro dom

0 0

0

0

1

0

USD Foreign micro dom

0 1

0 0

0

Foreign macro dom Foreign micro multi

0 1

1 0

0

Foreign macro multi

0

1

1

b2+b5=0.25

12.69 (0.0001)

b3+b6=-0.14

2.3s (0.126)

b2= 1.77

13.27 (0.0001)

bl+b4=0.169 b 1+b2=2.033 bl=0.259 bl+b3=-1.096 b3=-1.36

1

1

bl=0.259 bl+b2=2.033

USM

0

0

1

bl+b4=0.169

USD Foreign micro multi

0 1

0 0

0

b 1=0.259 bl+b2+b4+b5=0.419

Foreign micro dam Foreign macro multi

1

0

0

0

1

1

bl+b2=2.033 bl+b3+b4+b6=0.034

Foreign macro dom

0

1

0

bl +b3=- 1.096

All estimates of coefficients are Indicator Variables: GI foreign Dom nonmultinationals; USD F-statistic is based on 1 and 589 p-values are for two-tailed tests.

5.89 (0.016)

b5-b6=0.39

34.27

bl+b3+b4+b6=0.034

Comparisons:

N~trs:

b2-b3=3.13 bl+b3=-1.096 bl+b2+b4+b5=0.419

Multinational/Nonmultinational

I

1.29 (0.257)

(0.0001)

b4=-0.09

1.39 (0.249)

b4+b5=-1.61

11.17 (0.000 1)

b4+b6=1.13

0.89 (0.346)

from Table 4. micro GAAP; GA - foreign macro GAAP; Multi multinationals; U.S. nonmultinationals; USM U.S. multinationals. degrees of freedom.

tors to be of higher quality than the earnings information produced under U.S. GAAP. Since U.S. investors are less familiar with foreign GAAP earnings than with U.S. GAAP earnings, the result is not consistent with the expected difference and is discussed later in the section on relaxing the prior uncertainty probability assumption of the regression model.

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For comparisons between foreign macro firms and U.S. firms, the ERC difference for multinationals (b3 + b6) is -0.14 and the ERC difference for nonmultinationals (b3) is -1.36. This smaller ERC for foreign macro firms supports the view that foreign macro GAAP earnings announcements produce perceived lower quality earnings signals than U.S. GAAP earnings announcements. The F-values of ERC differences are 2.35 for multinationals and 1.29 for nonmultinationals, which are marginally significant at p = 0.126 for nonmultinational firms. Although F-statistics provide weak evidence of differences, the sign of the differences supports the notion that the unfamiliar macro accounting system produces a perceived lower quality earnings signal than the familiar U.S. accounting system. For comparisons between foreign firms (macro vs. micro), the ERC difference for multinationals (b, - b6) is 0.058 and the ERC difference for nonmultinationals (b2 - b3) is 3.13. The F-values for the differences are 34.27 for multinationals and 5.89 for nonmultinationals, which are significant at p = 0.0001 and 0.015; respectively. The smaller ERC for macro GAAP earnings announcements supports the view that U.S. markets perceive the earnings information produced under micro GAAP to be of higher quality than that produced under macro GAAP. In summary, the null hypothesis that there is no ERC difference between fore&r GAAP earnings and U.S. GAAP earnings is rejected for the comparisons of U.S. vs. micro, U.S. vs. macro, and micro vs. macro GAAP earnings. However, the difference between U.S. GAAP earnings and micro GAAP earnings is consistent with the view that the micro GAAP accounting system produces a perceived lower quality earnings signal than the U.S. GAAP accounting system. Other ERC differences in the study support the view that a less familiar accounting system produces a much lower quality earnings signal. MultinationaVNonMultinational

Comparison

The ERC difference between micro multinationals and micro nonmultinationals (b4 + b,) is -1.61 with an F-value of 11.17, which is highly significant at p = 0.0001. Th is result supports the notion that since foreign multinational firms have already made foreign currency adjustments in accordance with SFAS No. 52, the micro multinational firms produce lower quality earnings signals than the micro nonmultinational firms. The analysis of U.S. multinationals vs. U.S. nonmultinationals and foreign macro multinational firms vs. foreign macro nonmultinational firms produced no significant ERC differences between multinational and nonmultinational firms. The ERC difference for U.S. firms (b4) is negative (-0.09) which is consistent with the expected sign, giving support to the influence of foreign currency translation on the earnings’ adjustments for the multinational firms. However, the ERC difference for foreign macro firms (b4 + b6) is 1.13. In this case, the ERC of the

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foreign macro multinationals is larger than the ERC of the foreign macro nonmultinationals. The difference, however, is not significant (p = 0.346). The result may be explained by the fact that since nonmultinational firms have little reason to restate financial statements in accordance with GAAP or to be involved to any extent in foreign currency exchanges or translations, the price adjustment factor is not relevant. Relaxing The Prior Uncertainty Probability Assumption The results of the present study can be interpreted differently if the underlying prior uncertainty probability assumption of the experimental regression model is relaxed. The earnings response coefficients are: (a) an increasing function of prior uncertainty probability (PUP) regarding firms’ future cash flows and dividend-paying ability and (b) a decreasing function of the perceived quality of eamings information (NEI) (Collins and Salatka 1993). By matching size and industry, the regression model assumes that the prior uncertainty probability of the U.S. firms in the control group is equal to the prior uncertainty probability of the foreign firms in the treatment group. If this assumption does not hold, then some of the observed earnings response coefficient differences can be attributed to the effect of prior uncertainty probability with regard to firms’ future cash flows and dividend-paying ability.’ ’ Table 6 summarizes the effect of relaxing the assumption of similar PUP on the ERC differences. Under the presence of the PUP effect, the role played by the quality of the earnings information signal depends on the magnitude of PUP effect. Table 6 shows the relationship of the observed ERC differences to PUP differences. Row 1 of Table 6 presents the ERC difference between foreign micro multinational and U.S. multinational firms. The larger ERC for foreign micro firms is supported by the notion that foreign micro firms are perceived to have greater uncertainty associated with cash flow and dividend-paying ability (measured by PUP), lower quality earnings information signals (measured by NEI), and that the combined effect of PUP and NE1 leads to increased ERCs for foreign micro multinational firms. Since the accounting differences between foreign micro multinational and the U.S. multinational firms are very subtle, the results of the study support the notion that the larger ERC for the micro multinationals versus U.S. multinationals can be attributed to the dominant effect of the perceived uncertainty related to the cash flows and dividend-paying ability of the foreign micro multinational firms. Row 2 of Table 6 presents the ERC difference between foreign macro multinational and U.S. multinational firms under the combined effect of the uncertainty in future cash flows and dividend-paying ability (PUP) and the quality of the earnings information signal (NEI). The larger ERC for U.S. multinational firms is driven by the dominance of an increasing effect of the uncertainty in future cash

63

Perception of Foreign Financial Reports

TABLE 6 ERC Differences under the Presence of PUP Effects GAAP Comparisons’ (ERCs)

Micro > USM (.419) (.169) Macro < USM (.034) (.169) Macro < Micro (.034) (.419) (Micro) Dom > Multi (2.033) (.419) Notes;

PUP Effects

NEI Effects

US < Micro US < Micro US > Micro US > Macro US > Macro US I Macro Micro > Macro Micro > Macro Micro I Macro Dom > Multi Dom > Multi Dom 5 Multi

US > Micro US 5 Micro US > Micro US I Macro US 2 Macro US < Macro Micro I Macro Micro t Macro Micro< Macro Dom 5 Multi Dom 2 Multi Dom c Multi

Combined Effects

PUP PUP PUP PUP PUP PUP PUP PUP PUP PUP PUP PUP

& NE1 > NE1 < NE1 & NE1 > NE1 < NE1 & NE1 > NE1 < NE1 < NE1 > NE1 < NE1

Resulting ERC Differences

ERC Greater for Micro ERC Greater for Micro ERC Greater for Micro ERC Greater for USM ERC Greater for USM ERC Greater for USM ERC Greater for Micro ERC Greater for Micro ERC Greater for Micro ERC Greater for Dom ERC Greater for Dom ERC Greater for Dom

1 ERC differences between groups (the results from Table 5). PUP Prior uncertainty probability; NE1 Quality of the earnings information signal; Micro Foreign micro multinationals; Macro - Foreign macro multinationals: USM - U.S. multinationals; Dom Nonmultinationals; Multi Multinationals.

and dividend-paying ability and/or a decreasing effect of the quality of the earnings information signal. There are two predominant combined effects of PUP and NE1 which supports the larger earnings response coefficients for U.S. firms. The first combined effect is the situation where the PUP effect for the U.S. firms is greater than that of the foreign macro firms and the NE1 effect is less that or equal to the NE1 effect of the foreign macro firms. Both of these effect lead to increasing ERC for U.S. firms. The second combined effect is the situation where the PUP effect for U.S. firms is smaller than or equal to that of the foreign macro firms and the NE1 effect is less than that of the macro firms. In this case the domination of the NE1 effect leads to increasing ERC for U.S. firms. The greater ERC for micro multinational firms compared to macro multinational firms as shown in row 3 of Table 6 is best supported by the relationship in which the uncertainty of future cash flows and dividend-paying ability of micro multinational firms is smaller than or equal to that of the macro multinational firms and the quality of the earnings information signal of the micro firms is smaller than that of the macro firms. Additionally, the NE1 effect is the dominant effect in the relationship. The quality of the earnings information signal is expected to be greater for macro multinationals due to (a) the substantial accounting differences between the macro and micro systems; and (b) the increased familiarity of U.S. investors with the micro system’s accounting and GAAP reporting. Row 4 of Table 6 presents the ERC difference between nonmultinational micro firms and multinational micro firms. In the present study, nonmultinational micro firms generated a larger ERC than the multinational micro firms. The larger flows

64

INTERNATIONAL

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AUDITING & TAXATION, 6(l)

1997

ERC for nonmultinationals micro firms compared to multinational micro firms is supported by the notion that greater uncertainty in future cash flows and dividendpaying ability is the dominant effect in the analysis.

SUMMARY

AND CONCLUSIONS

The present study reveals that U.S. market reaction to preliminary earnings announcement events is affected by the quality of the earnings information signal; hence, the null hypothesis of no earnings response coefficient (ERC) differences between U.S. GAAP earnings and foreign GAAP earnings is rejected. In the present study, the finding that the ERC of U.S. GAAP earnings is greater than the ERC of foreign macro GAAP earnings is consistent with the notion that foreign macro GAAP earnings produce lower quality earnings signals than U.S. GAAP earnings. Likewise, finding that the ERC of micro GAAP earnings is greater than the ERC of U.S. GAAP earnings and foreign macro GAAP earnings is consistent with the notion that the micro GAAP earnings produce higher quality earnings signal than U.S. GAAP earnings or foreign macro GAAP earnings. The present study attributes the different perceptions of the informativeness of foreign disclosures (ERC differences) to differences in the accounting systems. The U.S. stock markets have a greater response to familiar U.S. GAAP earnings (micro GAAP) information than to unfamiliar macro GAAP earnings information. The results of this study which reveal that macro GAAP earnings produce lower quality earnings signals than micro GAAP earnings are consistent with this view. When the underlying assumption of similar prior uncertainty probability (PUP) regarding firms’ future cash flows and dividend-paying ability is relaxed, the results of the present study support the notion that the greater ERC of the foreign micro nonmultinational firms is a function of the dominant effect of the increase in the perceived uncertainty associated with future cash flows and dividend-paying ability (PUP). An unexpected result of the research is the finding that the ERC of foreign micro GAAP earnings is greater than the ERC of U.S. GAAP earnings. This result supports the view that U.S. GAAP earnings produce lower quality earnings signals than micro GAAP earnings. The present study attributes the larger ERC of micro GAAP earnings to the greater prior uncertainty probability for foreign firms. That is, the greater ERC of micro GAAP earnings can be caused by the difference in prior uncertainty probability regarding firms’ future cash flows and dividend-paying ability when the assumption of similar prior uncertainty probability between U.S. and foreign firms is relaxed. This explanation, however, is one of many plausible explanations. Another factor could be arbitrage, where efforts are made to bring U.S. and overseas market prices into equilibrium.

Perception of Foreign Financial Reports

65

The results of the present study have policy implications for the SEC which faces the dilemma of relaxing the U.S. financial reporting requirements for foreign firms while at the same time striving to protect U.S. investors. The relaxation would draw more foreign firms to the U.S. markets and promote the internationalization of the U.S. stock exchanges. However, maintaining the stringent U.S. rules would protect U.S. investors from the unfamiliar foreign reporting practices. Since the foreign macro GAAP produces lower quality earnings signals than U.S. GAAP, the SEC may protect U.S. investors from unfamiliar foreign reporting practices (foreign macro GAAP) by maintaining the stringent U.S. reporting requirements. However, the foreign micro GAAP produces higher quality earnings signals than U.S. GAAP. Given the fact that the U.S. accounting system is classified as a micro system, the GAAP difference between other micro and U.S. system is likely to be very subtle. To promote the internationalization of U.S. exchanges, the SEC could arrange reciprocal agreements with micro GAAP countries, similar to the multijurisdictional disclosure system between the U.S. and Canada. The intent of MJDS is to enhance cross-border listings by reducing the disclosure burden of the countries involved. The process of mutual recognition of various accounting systems is a long and tedious one. The MJDS agreement between the U.S. and Canada, two countries whose accounting standards and required disclosures are quite similar, took more than two years of intense debate and negotiations. Nevertheless, the same process could be followed with other countries although negotiations with other countries with more significant GAAP differences than those that exist between the U.S. and Canada may be more difficult. Since the diverse political and economic systems of the countries must be considered, the micro/macro grouping, which incorporates the economic and political natures of the countries, could be used as the starting point for establishing other multijurisdictional disclosure systems.

LIMITATIONSANDSUGGESTIONSFORFUTURERESEARCH The present study used a two-day event window, covering the day of the preliminary earnings announcement and one-day before the announcement. Although the choice of return windows is arbitrary, the present study performed sensitivity analysis by varying the length of the holding period from one day to seven days. No significant differences from the two-day window were obtained using a three-, five-, or seven-day event window. There are two limitations in estimating the returns for non-U.S. firms. One limitation is that U.S. dollar returns contain the lag effects of inflation and unexpected exchange rates which may deviation from expectations at time t-l used in

66

INTERNATIONAL

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1997

the estimation. A second limitation is that the single-country (U.S.) index is not appropriate for the sample firms that are listed on at least two national markets. Meek (1983) questions whether the returns of foreign firms are related to an index of the U.S. market. He suggests that a U.S. market index can serve as a proxy for a world index because indexes of the world’s equity markets across nations are correlated. Meek’s test results using the raw returns (domicile currency prices) of each country generated the same results as those obtained when using one index, the U.S. market index. The present study demonstrated that analysts’ forecast errors, as proxy for unexpected earnings, contributed to the stock market reaction. Although the prior uncertainty probability effect makes it difficult to generalize markets’ perceptions of quality of earnings in the international context, future studies may consider operationalization of the PUP effect in a model using indirect measures such as ex post operating cash flows. Additionally, future studies may use other financial reporting events such as earnings forecast and interim financial reports.

Acknowledgments: The authors wish to thank Rasoul Tondkar of Virginia Commonwealth University for his helpful comments on an earlier version of this manuscript. Additionally, the authors wish to thank Kathleen Sinning and the two anonymous reviewers for their insightful comments.

APPENDIX

1

Theoretical

Framework of the Empirical Model

Collins and Salatka (1993) discuss the theoretical framework in the following manner. First, the authors provide a traditional event study model. Second, they discuss the relaxation of the assumption of the constant earnings response coefficients in the traditional model. Third, they derive the empirical model for testing the perceived noise in the earnings signal. Traditional Event Study Model Information content studies model the abnormal security return (PE) associated with the earnings information release as a function of unexpected earnings (UE). The model for a typical two day return event is formulated as follows: PE

= u+t$+~

(1)

67

Perception of Foreign Financial Reports

The model is estimated with data pooled across firms and over time, assuming the earnings response coefficient (ERC; b) is “intertemporally and cross-sectionally constant.” Relaxation of Assumption Relaxing the assumption of constant ERC, Holthausen and Verrecchia (1988) model the price adjustments associated with information releases as a function of the firm’s future cash flows and dividend paying ability. The model relates the future cash flows to the signal in the accounting information system. The informativeness of the signal depends on the information characteristics perceived by investors under the following relation between the signal and the future cash flows: Yi =

xj t Ej

ej represents the noise in the earnings measurement process with variance Q’ (&j>= Qj2. The reciprocal of the variance is an indicator of the quality of the accounting signals. Empirical Test The above relation allows modeling the amount of the price adjustment associated with an information release as a function of following variables: 1. Prior probability uncertainty regarding future cash flows. 2. Variance of the noise in the information release. 3. Deviation of the signal from expected value. The model is estimated as follows: APj =

The model shows that the amount of price adjustment associated with the information release is positively related to the prior probability uncertainty regarding the future cash flows and negatively related to the perceived noise in the information signal. Hence, the lower the perceived quality of the earnings signal, the smaller the impact of a given amount of unexpected earnings on the price change (Collins and Salatka 1993, 122-124). In the present study, the prediction error (PE) is estimated from a market model cumulated over the two-day holding period (See Appendix 2 for the esti-

68

INTERNATIONAL

ACCOUNTING,

AUDITING & TAXATION, 6(l)

1997

mation process). The market model parameters are estimated over a 201-day trading period from day t = -199 to t = 1 (where day t = 0 is the day of firms’ reporting event date). The price (Pt_2) is the stock price, expressed in U.S. dollars, two days prior to the earnings announcement. Unexpected earnings (UE) are the difference between actual earnings per share (EPS) and forecasted EPS. Foreign firms are classified into micro/macro GAAP systems as suggested in comparative accounting practice research (Doupnik and Salter’s 1993). To control for a firm’s information environment with overseas operation, the sample firms are classified into multinational and nonmultinational firms. Thus, the model used in the present study is: (4)

where PE = Two-day (day -1 and 0) prediction errors from the market model around preliminary earnings announcement (PEA) date; P,_, = Stock price two days before PEA date; UE = Unexpected earnings (Actual EPS - VL forecasted EPS); GI = 1 if foreign micro GAAP, 0 otherwise; GA = 1 if foreign macro GAAP, 0 otherwise; M= 1 if multinational firm, 0 otherwise; E = A random disturbance distributed N(0,02).

APPENDIX

2

Estimation

of Prediction

Errors

The estimation procedures used in this study are based on the traditional market model. The one factor market model specifies a linear exante relation between the return on the shares of firm Z and the return on the market portfolio as follows: Ri, = ai + PiR,nT + eiT

where

(3

Perception of Foreign Financial Reports

69

Rj, = Return (CRSP) on firm i for estimation period T, index) on market portfolio for R mT= Return (CRSP equally-weighted period T, &iT = error term in the regression, assumed to be identically and independently distributed (iid), = 1,. . ., N, firm index, and I T = 1,. . .,T, time index. This market model assumes that the joint distribution of returns is stationary through time and distributed as follows:

L 1 O,Y#T

cov(e,~, “iT) =

o?

y

=

T

(6)

,’

cMe,,> R,,lT) = 0

where Y, T= Z =

l...T, and l... N.

The regression provides an unbiased estimate of o2 as follows:

(7)

The present study estimates the market model for 201 trading days, day t = -199 to day t = 1, relative to the reporting event (t = 0). A minimum of 50 observations are used to estimate the coefficients of the market model. Ordinary leastsquares regression (OLS) is performed to obtain estimates of ai and bi for ai and pi, respectively. The estimated coefficients ai and bi are used to form prediction errors for event period as follows: uif = R;, - (ai + hiR,,J

The pit are assumed to be distributed regression model (CLRM):

(1)

E(u;,)

as follows under the classical linear

= 0

0, COV(Uis, I+)

=

i

cov(u;,,

ujt)

=

[

s # t

circJF,i = j 0,

(3)

(8)

s# t

1 1

citG,T, i= j

70

INTERNATIONAL

ACCOUNTING,

AUDITING

& TAXATION,

6(l)

1997

COV(Uit,R,,,) = 0

(4)

where,

s,t =

l... t, = l... N, and

ij c=

(R,,,,- CA2

1+;+

T c

(Ynr-

Q2

T= I

T = number of days in the estimation period, and T

*,

=

f

c

*mT

T= I

Equations (3) and (4) have the adjustment factor Cit, which extends the estimation model to include the event period. In the present study, the adjustment factor approaches one (C, = l.OOOl), as reported in most event studies. Hence, the estimation process ignores the adjustment factor.

NOTES 1.

2.

3.

4.

5. 6.

7.

The financial reporting of foreign firms differs from domestic firms’ in the following areas: (a) The preliminary earnings announcements in the media are usually based on foreign GAAPs; (b) Foreign firms file a 20F that is less stringent than a 10K for U.S. firms regarding the filing date, disclosure level, and GAAP application; and (c) Filing of quarterly reports and annual reports to shareholders is not required as part of foreign reporting practice. It can be argued that other factors, such as exchange and sovereign risks unique to foreign security investment, play a more significant role in causing the differential ERCs. In any case, the present study tests the ERCs differences between foreign firms and U.S. domestic firms. Studies indicate that being in similar industries minimizes differences in economy wide and industry wide sources of information, while firm size can be used to proxy for the availability of firm-specific nonaccounting information (Holthausen and Verrecchia 1988; Collins and Salatka 1993). The criterion for multinational classification varies in the literature, ranging from 5% to 50% foreign sales out of total sales. Also, other indicators, such as the number of foreign branch offices and multiple stock listings are used in some studies. ADRs traded in the over-the-counter market are unsponsored and are excluded from the sample because the SEC filing requirements do not apply to the unsponsored ADR firms. Meek (1983) examines this “third” reporting event but reports that four-fifths of the home earnings announcements coincide with the U.S. announcement and the information content of the home reporting event is also the same as the information content of the U.S. reporting event (p. 397). In cases where analysts’ forecasts of earnings were unavailable, earnings from the prior year were often used as a proxy for expected earnings in the literature. However, the association

Perception of Foreign Financial Reports

8.

9.

10. 11.

71

between the earnings change and abnormal stock return was weak or not significant (i.e., Meek’s 1991 study). Five of the outliers have unusually large returns, and one has an unusually large earnings fore-

cast error.

R* of typical event studies ranges from 5% to 15%, and Lev (1989) advocates further refinement of the return/earnings relation by considering factors such as qualitative characteristics of earnings. The present study tested the ERC difference between U.S. firms (multinationals and nonmultinationals) and foreign firms, resulting in significantly lower ERC for U.S. firms. There are a few proxies indirectly measuring the PUP, but the main focus of the present study is on the quality of the in earnings signal, leaving the task of capturing the PUP effect for future study.

REFERENCES American Accounting Association. 1977. Report of the Committee on International Accounting Operations and Education. Accounting Review (Supplement) 65-101. Amir, E., T.S. Harris, and E.K. Venuti. 1993. A comparison of the value-relevance of U.S. versus non-US. Gaap accounting measures using form 20F reconciliations. Journal of Accounting Research 3 1 (International Accounting Supplement): 230-264. Belsley, D., E. Kuh, and R. Welsch, R. 1980. Regression Diagnostics: IdentifjGtg influential Data and Sources qf Collinerarity. New York: John Wiley and Sons. Berry, Ian. 1987. The need to classify worldwide accountancy practices. Accountancy (October) 90. 91. Choi, F.D.S., and R.M. Levich. 1990. The Capital Market Effects of International Accounting Diversity. Homewood, IL: Dow Jones-Irwin. Collins, D.W., and W.K. Salatka. 1993. Noisy accounting earnings signals and earnings response coefficients: the case of foreign currency accounting. Contemporav Accounting Research lO(Fal1): 119-159. DaCosta, R.C., J.C. Bourgeois, and W.M. Lawson, W.M. 1978. A classification of international financial accounting practices. International Journal of Accounting Education and Research (Spring) 73-85. Dann, L.Y. 1981. Common stock repurchases. Journal ofFinancial Economics 9(June): 113-138. Doupnik, TX, and S.B. Salter. 1993. An empirical test of a judgmental international classification of financial reporting practices. Journnl oflnternational Business Studies 24( 1): 41-60. Duffy, D., and L. Murray. 1994. The wooing of American investors. Wall Street Journal (February 25), p. A14. Frost, C.A., and G. Pownall. 1994. A comparison of the stock price response to earnings disclosures in the U.S. and the U.K. Journal of Accounting Research 33(Summer): 78-103. Holthausen, R., and R. Verrecchia. 1988. The effect of sequential information releases on the variance of price changes in an inter-temporal multi-asset market. Journal of Accounting Research (Spring) 82-106. Lev, B. 1989. On the usefulness of returns and earnings research: lessons and directions from two decades of empirical research. Journal ofAccounting Research (Supplement) 153-192. McQueen, P.D. 1993. The Information Content of Foreign and U.S. GAAP Earnings in SEC Form 20-F. Working Paper, CUNY-Baruch College, New York. Meek, G.K. 1983. U.S. securities market responses to alternative earnings disclosures of non-U.S. multinational corporations. The Accounting Review 58(2): 394-402.

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6(l)

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1991. Capital market reactions to accounting earnings announcements in an international context. Journal of International Financial Management and Accounting 3(2): 93-109. Mueller, G.G. 1967. International Accounting. New York: Macmillan. -. 1968. Accounting principles generally accepted in the U.S. versus those generally accepted elsewhere. The Journal ofAccounting Education and Research (Spring) 9 l- 104. Nair, C.W., and W.G. Frank. 1980. The impact of disclosure and measurement practices on international accoutning classifications. Accounting Review (July) 426-460. Nobes, C. 1983. A judgmental international classification of financial reporting practices. Journal of Business, Finance and Accounting (Spring) 1- 19. , and R. Parker. 198 1. Comparative lnternationul Accounting, 3rd ed. Englewood Cliffs, NJ: Prentice Hall. Peterson, P.P. 1989. Event studies: a review of issues and methodology. Quarterly Journal @‘Business and Economics (Summer) 36-66. Pope, P., and C.G. Inyangete. 1992. Differential information, the variability of UK stock returns, and earnings announcements. Journal ofBusiness Finance and Accounting 19(4): 603-623. Rivera, J.M. 1989. The internationalization of accounting standards: past problems and current prospects. The International Journul ofAccounting 24: 320-341. Salwen, K. 1991. Breeden rejects big board plan to relax listing standards for foreign corporations. Wall Street Journal (May 3), p. 8. Seidler, L.J. 1967. International accounting-the ultimate theory course. Accounting Review (October) 775-78 1.

Canada

England

Italy

Canada

England

Noreen Energy Rer

Unilever Plc-Amer Shra

Montedison S.P.A.-ADR

Seagram Co Ltd

Cadbury Schweppes Plc-ADS

Macmillan Bloedel Ltd

2834

2834

2860

2870

Australia

France

England

Netherlands

England

Denmark

England

Canada

Rhone-Poulenc Sa-Spon ADR

Imperial Chem lnda Plc-ADR

Akzo NV-ADR

Smithkline Beecham Plc-ADS

Nova-Nordisk AIS-ADR

Glaxo Holdings Plc-ADR

Nova Corp Alta

2911

2911

3330

3334

3570

3576

England

Spain

Canada

England

Canada

Canada

Canada

Japan

Japan

Canada

Japan

British Petroleum Plc-ADR

Reps01 S.A:ADR

Imperial Oil Ltd

British Steel Plc-ADR

Into Ltd

Alcan Aluminium Ltd

United Domimon Industries

HI&hi Ltd-ADR

Net Carp-ADR

Gandalf Technologies Inc

Matsushita Electric-ADR

3600

3570

3440

3312

2911

2911

Norway

England

Norsk Hydro As-ADR

2834

2800

2800

2800

Shell Tran&trade-NY SH

-

I3 17.309

262 I

Canada

Abitibi Price Inc

News Coq Ltd-ADR

0 Freeport Mcmoran Inc

Name And Share T\pr

60826.4

Inc

Merck& Co

Co

0.5 Newmont Mimng Corp

0.4 Conagra Inc

0.59 Mitchell Energy & Dev-CL A

0.355 Potlatch Corp

0.404 Georgia Gulf Carp 0.497 Amgen Inc

Co

3600

3576

3570

3490

3334

3330

56274 0.171 National Service lnds Inc

617.168 0.387 DieboldInc

16410 0.561 Westinghouse Electric Corp

0

(continued)

543.852 1633.811

3640

0

0

0.112

1697.24 9251

0 0.07

572.21 145 I ,656

3578

3510

3572

3460

3350

0 0.097

1908.492

0.172 4007.9

llY33 3312

2911

0 0.04

16186

0 291 I

4805 9592.144

949 I .5 0.404 Handy & Hannan 64523 0.618 Quantum Carp

0 0.172 1058.5 0.037

2975.03

1717.039

lOY3.041 0.112

0

0 2747.843

0.065

2376

0.1 12

0

0

0.015

0

0

779.455

2525.8

3701.973

1326.612

2184.7

5127

0

2911

2911

2870

2860

2842

2836

2851

2810

2800

2821

2711

2621

242 I

20X6

11393.7

11128.4

2011 2082

21519.1

0

0

902.x34

1311

0

0.063

2011

613.196

i-5%

0.164

3330 1695.512 0.405 Newell Companies

S&Y 1641.373 8494

1311

1040

1000

SIC#

0.357 Asarco Inc

2397.249

0.15 Bethlehem Steel Corp

36812 0.467 Phillips Petroleum Co 2073.6

3312

17503 0.246 Uax Corp.Consolidated 2911

2911

56877 0.758 Ashland 011 Inc

2864.X59 0.294 IMC Fertilizer Group

3098 0.391 Ethyl Carp

7230. I YY 0.462 Clorox CO/DE

5597.597

9662.5 0.464 Sherwin-Williams

5518.199

7763 0.361 Olin Corp

18971 0.497 Goodrich (B.F.) Co

1817.87 0.273 Times Mrror Company-SER A

4886.199

Carp

0.17 Coca-Cola Enterprises

400.48 0.191 Louisiana-Pacific

238X

13073.8 0.665 Anheuser-Busch Cos Inc

13243 0.342 IBPInc

50095

718.4

1275 0.373 Occidental Petroleum Carp

659.646

2911

3570

0.332 General Electric Co

Name and Share rvl,e

103160 0.866 Lyondell Petrochemical

0.155 fntl Business Machines Carp

Of America

FS9

1654.91 I 0.432 Cyprus Amax Minerals Co

S&S

Control U.S. Nonmullinafion~l Flnnr

2911

2890

2860

2834

2834

2834

2800

2800

2800

2711

2621

2430

2086

2080

2013

2000

1311

1311

0.228 Hewlett-Packard Co

0.893 Trinova Corp

0.869 Alummum

0.8Y3 Engelhard Corp

0.216 Armco Inc

0 Texaco Inc

0 Atlantic Richfield Co

0.699 Mobil Carp

0.501 Exxon Carp

0.616 Hercules Inc

0.09 Arco Chemical Co

0.563 Pfirer Inc

0.426 Warner-Lambert Co

0.903

0.675 Grace IW.R.) B Co

0.663 Monsanto Co

0.698 Dow Chemical

0.829 Dow Jones&Co

0.32 Scott Paper Co

0.58 TJ International Inc

0.542 Whitman Corp

1.138 Coca-cola Co

0.692 Sara Lee Carp

0.412 Philip Morris Cos Inc

0.204 Maxus Energy Corp

0.33 I Oryx Energy Co

1040

1000

SIC#

Control U.S. Mulrinational Finns

0.56 Homestake Mining

FS%

160.9 0.796 Corn carp

30565

64966.9

1710.655

7596

2558.929

6510

7040.746

16602

58852.5

38650

8355.121

2380.736

7209

1761.466

9133

9285.789

12742

14781.1

7810.914

2390.409

242 I

Canada

2711

5 102.437

5214

11504.3

43719

781.444

2086

2080

ZOOa

2000

1311

1311

Australia

Broken Hill Proprietry-ADR 10934

486.438

1040

Sales

LAC Minerals Ltd

SIC# 144.978

COUIlt~

Philippines

loo0

Benguet Corp.CLB

Name And Share Type

Trearment Foreign Firm

APPENDIX 3 Profile of Firms for the Perceived Quality of Earnings

Canada

England

Canada

England

Engiand

England

England

England

England

Transcanada Pipelines Ltd

British Gas PIc-ADR

Laidlaw Inc-CL B

Bat Inds P.l.c.-ADR

WQP Group Plc- ADR

Saatchi & Saatchi Plc-ADR

Bet Plc-ADR

Reuters Holding Plc-ADR

Carlton Commun Plc-ADR

Cineplex Odeon Canada Sales: 1992 tote1 sales (n&ion $) FS%: 1992 overseas sales percentage

Spain

Telefonica De Espana-ADR

0.421

0.519

0.482

0.313

0.513

7830

7819

OS21 0.691

518.723

0.84

0.478

919.474

2984.8 2371.779

7359

7380

I1 19.469 0.842

7311

0.784

2250.657

7372 7372

Microsoft Corp Computer

7812 784 I

Dxsney (Walt) Company Blockbuster Enmnt Corp

Associates lntl Inc

7311

Omnicom Group

6199 7311

Carp

4Y53

1nte~ubIi~ Group of Cot

1tt

Browning-Ferris

lnc 1200.494 0.867 King World Productions Inc

7504 0.144 Paramount Communications

7822

503.174

4264.898

7812

0

0

0

0.095 1940.571

2479.847 1841.008

7374

7373

2758.725 0.459 Computer Sciences Corp 0.54 A~~tomatic Data Processing

0.092

1134.333 1385.161

7320

0

0

0

II

0.49 Equifan Inc

13308.X

1518.603

0

0

0

0

0.057

0

0.004

1388.133

6199

4955

0 0.153

7320

1804.42 I 0.689 First Financial Mgmt Corp

21651 0.303 Lows carp

3287.462 0.173 Chemical Waste Management

10062.9

4922

233.716 0.088 Coastal Corp

4950

0 Allwaste Inc 0.492

2724.399

4922

1484.423 0.109 Transco Energy Co

4922

0 Sonat Inc Inds

4813

13155

19984 0.119 Nynex Corp

4512

UAL Corp

4x13

4512

0.274 usair Group

12889.7 0.377 AMR Carp/de

4513

Federal Express Carp

14396

6686.41

3x12

17040 0.442 Raytheon Co

3861

Xerox Corp

4512

9058.214

3812

7808.042

3335.403 2094.913

3812

20183 0.435 E-Systems Inc

5692.597 0.276 Loral carp

3812 3861

Eastman Kodak Co

2735.2

Litton Industries Inc

3711

0.32 Paccar Inc

1783.342

37i4

Echlin Inc

0.151

35501 1046.345

3711 3714

130590 0.324 Smith (A 0) Corp

3711

General Motors Corp

100132 0.357 Chrysler Corp

3711

Ford Motor Co

0 0.055

786,078 3640

Hubbell fnc-CL B

7440 0.352

3674

Texas Instruments lnc

0

0

0

535.553

580.831

3690

3663

0

0.08

Standard Motor Prods

1288.024 0,317

3690

Varian Associates lnc

Inc

536.319

129.433

506.3

3674

Intel carp

Scientific-Atlanta

3661

3652

1243.5 0.048 318.93

3614

5843.98 0.484

3663

Motorola Inc

Corp

365 1 362 I

Micron Technology Inc

13303 0.603

3661

General Datacomm Inda

0.25 Dsc Communications

1296.301 0.655 Quixote Carp

3640

Raychtm Carp 197.858

105 1.076 0.264 Baldor Electric

3337.145 0.593 Zenith Electronics Carp

3640

3678

Thomas & Betts Corp

Amp Inc

0 GTE Corp

0.353

0.558

0.393

0.671

0.281

18641.6 0.952

1925.617

I5514

2955.274

10726

8399.093

4543.476

9440.519

15315.3

233X12

1172.5 0.868

81307

35532.5

4537.902

4341.261

3756.301

0.734

0.87

0.427

0.636

0.621

7311

6199

4953

4924

4922

4813

4512

4.512

3861

England

Japan

Fuji Photo Film-ADR

386 1

3812

British Airways Plc-ADR

Japan

3711

3711

3711

3695

3690

3674

8408.898

6704.398

366 I

3661

3638.027

34421.7

365 1

3652

5083.703

3651

Kim Royal Dutch Air-NY REC Netherlands

Canada

Canon Inc-ADR

Japan

Tdk Carp-ads

Canadian Marconi Co

Australia

Pacific Dunlop Ltd-ADR

Sweden

Japan

Kyocera Carp-ADR

Volvo Ab Swe-ADR

Canada

Northern T&corn Ltd

Japan

Sweden

Ericsson (L.M.) Tel-ADR

.Japan

Netherlands

Polygram N V

Toyota Motor Corp.ADR

Japan

Sony Corp.amer Shares

Honda Motor Ltd.AM Shares

Japan

Pioneer Electron-Span ADR