The association between financial accounting measures and real economic activity: a multinational study

We investigate how cross-country differences in financial accounting standards affect the relation between financial accounting earnings and real economic value-relevant events that underlie those earnings. Based on previous research and economic theory we hypothesize that, because of differences in legal systems and the demand for accounting information, differences in legal protection for external shareholders, and differences in the degree of tax conformity in our sample countries, accounting earnings in the UK and the US will be more closely related to underlying economic activity than will accounting earnings in France and Germany. Empirical results are generally consistent with our hypothesis. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: classification: M41; P51.