An international comparison of income statement and balance sheet information: Germany, Japan and the US

As accounting regulators develop international standards, it is helpful for them to understand the use of financial statements by investors in different countries. In this study we compare the value relevance of earnings relative to book value of equity in Germany, Japan and the US owing to the size of their capital markets and differences in accounting systems and institutional structures. Accounting in Germany and Japan is conservative, creditor-oriented and tax-based, with institutional structures that rely on bank financing and close relationships between capital providers and investee firms, while the US is used as a basis for comparison. This study hypothesizes that book values are more value relevant than earnings in Germany and Japan while earnings are more value relevant in the US, because capital providers in Germany and Japan are more concerned with balance sheet measures such as liquidity. Also, accounting characteristics such as conservatism and tax conformity may lead to greater value relevance of the balance sheet compared to the income statement in those countries. Our results provide evidence that book value of equity is more value-relevant than earnings, particularly in Germany, with mixed results for Japan. In the US, positive earnings are more value relevant than book value of equity, but not negative earnings. In summary, we provide evidence concerning the relative value relevance of summary measures of the balance sheet versus the income statement. Standard-setters can then look at potential causes for these differences and determine if proposed accounting standards will have a desired outcome.