The difference between reported price-earnings ratios in the United
States and Japan is not as puzzling as it appears at first glance. Nearly
half the disparity is caused by differences in accounting practices with
respect to consolidation of earnings from subsidiaries and depreciation of
fixed assets. If Japanese firms used U.S. accounting rules, we estimate that
the P/E ratio for the Tokyo Stock Exchange would have been 32.1, not the
reported 54.3, at the end of 1988. Accounting differences are unable,
however, to explain the sharp rise in the Japanese stock market during the
mid-1980s. Changes in required returns on equities, or in investor expectations
of future growth for Japanese firms, must be invoked to explain this
phenomenon. Real interest rates declined during the period of rapid price
increase, but there is little evidence that growth expectations became more
optimistic. The real interest rate changes do not, however, appear large
enough to fully account for the change in stock prices.
*Published:
Journal of Financial Economics, Vol. 29, (October 1991), 37-364
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