Accounting measures and international pricing models: Justifying accounting homogeneity

We study the importance of homogeneous accounting data when testing international versions of asset pricing models. Specifically, we focus on a pricing model commonly used by practitioners – the Fama–French three-factor model – which uses accounting information and has traditionally performed poorly at the cross-country level. We show that international versions of the model perform significantly better if the accounting information is homogeneous across firms. We apply the model to a set of firms that follow common accounting standards – the IAS/IFRS – and also to firms that have issued ADRs in the US – and therefore must report following both US GAAP and their own domestic standards. In both cases our results show that the accounting dimension is relevant: the use of homogeneous accounting measures allows for much higher goodness-of-fit of international versions of the three-factor model, at levels similar to those of domestic versions and superior to those of non-homogeneous versions. This suggests that further accounting homogeneity could lead to more accurate pricing and valuation of international assets and to an improvement of the efficiency of international fund allocation.