Dirty surplus accounting flows and valuation errors

For France, Germany, the U.K. and the U.S. for the period from 1994 to 2001, this study explores empirically the association between valuation errors from a standard empirical application of the residual income valuation model and violations of the clean surplus relationship (dirty surplus accounting flows). Motivated by concern that the effect of dirty surplus accounting on the applicability of accounting‐based valuation models might vary across accounting regimes, the study also documents differences across pairs of countries in the relationship between valuation errors and dirty surplus flows. The study finds some weak evidence of predicted relationships between valuation errors and dirty surplus flows in the U.S., but finds little evidence of such relationships elsewhere. There is some limited evidence of cross‐country difference in the relationship between valuation errors and dirty surplus flows, mostly involving the U.S.