Accounting Valuation, Market Expectation, and the Book-to-Market Effect
Richard Frankel, University of Michigan
Charles M. C. Lee, Cornell University

Richard and Charles produced two papers in connection with this project.
The first paper, “Accounting Valuation, Market Expectation, and the Book-to-Market Effect,” shows that an accounting based model of value can produce a value-to-book variable that is a better predictor of cross-sectional returns than is the frequently examined book-to-market ratio. They further show that analyst earning forecasts are predictable, and that the predictive value of the value-to-book ratio can be improved by incorporating analyst forecast errors.
The second paper, “Accounting Diversity and International Valuation,” explores the accounting-based valuation model in an international context. The model that produces a measure of firms’ fundamental value that is theoretically immune to accounting differences across countries. The authors explain why the model has the potential to become a vehicle by which accounting numbers produced under alternative systems can be translated into consistent value estimates. Empirical results show that the model helps explain cross-border stock prices. (Accepted Fall 1996.)