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Accounting harmonization and the value-relevance of dirty surplus accounting flows

By Clare Roberts and Yue Wang


Purpose – The purpose of this paper is to examine the effects of institutional factors and the European Union (EU) accounting harmonization on the value-relevance and comparability of dirty surplus accounting flows (DSFs) in the member countries throughout the period 1993 to 2002. Design/methodology/approach – The returns-earnings models and fixed-effect operating income growth models are used to examine the differences in the incremental and relative relevance of DSFs between countries which have a piecemeal system of regulation with significant input from the profession and/or market participants, and the code law countries with the government being the most important institution with regard to accounting regulation. Moreover, the relevance of DSFs in the three sub-periods is compared, each reflecting quite distinct attitudes in the EU towards international accounting harmonization. Findings – DSFs are incrementally relevant in Denmark, Finland, Ireland, Sweden and the UK, where equity market plays an important role in the country's financing system; and in comparison to comprehensive income, reported income is a dominant measure of performance in most European countries, with the exception of the five afore-mentioned countries. There is also evidence that cross country differences in the value-relevance and predictability of DSFs decrease in the later years of this sample period. Research limitations/implications – Future research focusing upon the specific accounting changes made by companies in the EU is needed for a better understanding of the relative importance of stock market integration and standard setting changes in explaining the characteristics of DSFs. Practical implications – The results indicate that the convergence in the reporting of DSFs over time is driven by global capital market integration, and more importantly, the accounting harmonization activities carried out via self-regulation with significant input from the profession and/or market participants at national level. Originality/value – The paper seeks to explore, firstly, the extent to which differences in the reporting of DSFs across the EU may be explained by institutional differences. Secondly, it explores whether or not differences across the countries have decreased in three phases of the EU harmonization process.

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