by Richard Frankel; Charles M. C. Lee NYSE Working Paper #96-01　　 Abstract 　International differences in accounting rules pose a significant challengeto investors interested in making cross-border comparisons of firm value.While current efforts to harmonize international standards are laudable,they are unlikely to completely eliminate cross-border diversity. In thisstudy, we suggest an alternative, and complimentary, approach for copingwith international accounting diversity. 　Our approach is based on a valuation technique referred to as theDiscounted Residual Income or the Edwards-Bell-Ohlson (EBO) model. We showthis theory can be operationalized to create "V," a measure of firms'fundamental value which is conceptually identical to the present value offuture cash flows (or dividends), but is based on a firm's book value andexpected earnings. One of the most appealing features of V is that it istheoretically immune to differences in accounting methods across firms orcountries. 　In this paper, we develop the theoretical underpinnings of the EBOvaluation model in an international context. We explain why the model hasthe potential to become a "universal translator," that is, a vehicle bywhich accounting earnings and balance sheet numbers produced underalternative national accounting systems can be translated into consistentmeasures of firm value. Conceptually, the model operates equally well underany accounting system provided a set of minimal conditions is satisfied. Wedefine these conditions, and evaluate existing accounting systems acrossdifferent countries in the context of these conditions. 　We also present empirical evidence on the usefulness of this model inglobal asset allocation decisions, and in explaining cross-sectional stockprices in different countries. We document the value-relevance of earningsforecasts provided by local financial analysts, and argue that theseearnings forecasts represent a potential omitted variable for the currentset of accounting studies dealing with the information content of U.S. GAAPreconciliation (Form 20-F) disclosures. 　Our results suggest that a proper valuation model can greatly mitigateaccounting diversity problems in international valuations. Given reliableearnings forecasts and book values, a detailed reconciliation of accountingdifferences is not necessary to make cross-border value comparisons. Ouranalyses also imply that regulatory efforts need not focus on achieving"superficially comparable" earnings and book values, or standardizing suchspecific rules as the amortization of goodwill. Rather, greater emphasismight be more profitably placed on ensuring that professional analysts havethe necessary information to make reliable earnings forecasts consistentwith local accounting standards. ,