The accounting dimension in financial integration: International pricing under different accounting standards
AbstractWe suggest that accounting homogeneity is a necessary step in the process of financial market integration. Specifically, we analyze the effect of integration in the “accounting sense” in the correct analysis of international investments and fund allocation by estimating several pricing and valuation models in a cross-country context. We design our analysis in such a way that we can control for differences in accounting standards of the firms contained in the sample. Our results show that the accounting dimension is relevant for cross-country pricing and valuation: the use of homogeneous accounting leads to higher goodness-of-fit of international versions of the models, at levels similar to those of domestic versions and superior to those of non-homogeneous versions. Our results imply that accounting integration is an additional, and important, dimension of financial integration and that progress towards further accounting homogeneity would lead to more accurate pricing of international assets and to an improvement of the efficiency of international fund allocation.
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