The predictive ability of financial information for future earningsa European perspective

Resumen

The objective of this paper is to analyse cross-national differences in the predictive ability of financial information (accounting and market data) for future earnings. We adopt a European perspective in our analysis by focusing on four representative European countries (France, Germany, Spain and the UK) in order to assess whether the institutional and accounting differences among them result in inter-country differences in the predictive value of financial information. In particular, we consider that differences in the extent of conservatism, due to country characteristics, such as the legal system (code-law vs common-law), the way companies finance their operations, and the relationship between accounting and taxation, are likely to influence the measurement of accounting variables and, as a result, affect their predictive ability about future earnings. Furthermore, cross-national differences in the disclosure requirements of the respective stock exchanges, as well as accounting conservatism, are likely to result in differences in the forecasting value of security prices. In this regard, and due to inter-country differences in accounting conservatism, the forecasting ability of stock prices in the event of "good news" about the firm is likely to differ across countries. Our results confirm that there are indeed differences in the predictive ability of both accounting and market data across European countries, which is an indirect test of the economic consequences of different accounting measurement rules, an aspect that has received little attention by researchers to date.