In order to assess whether international differences in accounting and finan- cial reporting cause overseas shares to be analysed differently to domestic shares, the sample in the questionnaire survey was split into analysts who only analyse UK companies, and those who analyse overseas companies.
Table 7.9 presents the results. Overall, with the exception of technical analysis and DCF analysis, there are surprisingly few differences. More specifically, fundamental analysis is by far the most influential technique in foreign company analysis, with a mean response broadly corresponding to ‘extremely useful’ on the 5-point scale. Furthermore, ratio analysis and managerial assessments as components of fundamental analysis are also widely used.
Prima facie, the results in Table 7.9 do not appear to indicate that ana- lysis techniques which do not involve accounting information are more use- ful in transnational equity analysis than in domestic equity analysis, as found in some prior research. However, the difference between the usefulness of DCF analysis to analysts of foreign companies is apparently indicative of a greater reliance on cash flow information and dividends, rather than on earnings and book values; possibly because of lower comparability of for- eign accruals-based information. This is consistent with the findings of Choi and Levich (1991). Further light is shed on this issue in the next chap- ter where the usefulness of different sections of overseas annual reports is examined.
Table 7.9 Usefulness of equity analysis techniques in UK and transnational analysis
UK analysis Transnational analysis
Mean Std. dev. Mean Std. dev.
Fundamental analysis 4.69 0.61 4.79 0.50
Ratio analysis 4.23 0.90 4.33 0.90
Management assessment 4.15 0.81 4.18 0.81
DCF 2.96 1.00 3.16 1.17
Top-down† n/a n/a 3.05 1.19
EVA 3.17 1.00 3.00 1.15
Technical analysis 2.76 0.90 2.53 1.21
Beta analysis 2.13 0.94 2.13 1.01
†Only applies to respondents involved in foreign equity analysis.
The finding that technical analysis is substantially more useful in UK company analysis than in foreign company analysis is also noteworthy.
Given that technical analysis does not require the use of accounting data, cross border comparisons can be made more easily with share price per- formance. Analysts of foreign companies were therefore expected to be more, rather than less, reliant on technical analysis relative to domestic analysts.
Although interviews confirmed the widespread use of charts for timing decisions, with the exception of analysts and fund managers involved in the Japanese and US stock markets, this use was primarily for confirmatory, rather than predictive, purposes. For example, Analyst 9 pointed out:
Technical analysis is useful for examining the market’s reaction to previous events, such as changes in management and the business cycle.
A number of reasons were suggested for the finding that technical ana- lysis is more useful in UK equity analysis. First, many other markets do not have the necessary liquidity for technical analysis. That is, share price movements may not be frequent enough to identify trends and patterns in share prices. Second, the emphasis on sector performance rather than coun- try performance has led to technical analysis being of limited use in some markets. Fund Manager 6, for example, noted the limitations of national stock market data:
If you’re analysing Mannesmann, what the German market does is less im- portant than what the European market or telecoms sector does.
Three respondents stated that they do not hold technical analysis in high regard in general, (i.e., in domestic or transnational analysis) while three fund managers stated that the data necessary for technical analysis are either not available, or not reliable. For example, Fund Manager 18 noted that Japanese share price data are not always adjusted appropriately for stock splits. Fund Manager 9 had experienced inequality in the access to information necessary for technical analysis. She stated that in certain European markets, the data are not always available, and are sometimes given to certain investors before others:
I would never base my decision on [technical analysis] but I might look at charts just to perhaps support my judgement in terms of timing buying and selling. Also I think in Europe, information is not necessarily freely available.
If you take Norway for example, you don’t always really know what is going on – a share will jump ahead of an announcement and that is supposed to not be able to happen. Due to insider trading and laws, everyone should have the same information at the same time, but in Europe that doesn’t happen.
Fund managers and analysts involved in analysing Japanese and particu- larly US companies, however, expressed surprise at technical analysis be- ing of limited use relative to domestic analysis. Analyst 10 (an institutional sales analyst who covered US companies) stated that momentum analysis is very popular in the US, while Analyst 11 (an institutional sales person analysing Japanese companies) pointed out that charts can help with selling equities if the pattern reinforces the sales advice he is making. Consistent with the findings of Olbert (1994), therefore, the use of technical analy- sis appears to be dependent upon the characteristics of the relevant stock exchange.
Although the top-down approachprima facierepresents a valuable mech- anism for coping with international accounting and reporting diversity, its usefulness relative to other techniques in Table 7.9 indicates that analysts of foreign companies do not consider the technique very useful. Selecting investment opportunities on the basis of market and economic factors and then focusing on company specific performance obviates the need for com- parable accounting information and was therefore expected to be highly regarded. The mean of 3.05 on the scale, however, corresponds only to the
‘quite useful’ category in the questionnaire. This result broadly corresponds to the findings of Bhushan and Lessard (1992), who found that the top-down approach was only used by a third of fund managers. Moreover, it is consist- ent with the increasing focus on sector, rather than country, factors outlined earlier.
The techniques used by analysts of foreign companies therefore reflect a similar approach to analysts of UK companies; fundamental analysis is the predominant technique to both groups. The techniques which avoid non-comparable accounting data (i.e. technical analysis and the top-down approach) were expected to be very useful in transnational analysis.
However, they are not remotely as popular as fundamental analysis, hence, international accounting differences do not appear to be so significant as to deter analysts or fund managers from using fundamental analysis.
7.4.1 International variation in transnational analysis techniques
As noted above, the interviews revealed a common pattern in the geo- graphical organisation of the financial institutions. An interesting ques- tion, therefore, is the extent to which analysts of foreign companies vary their techniques depending on the country of domicile of the com- pany being analysed. Table 7.10 presents the usefulness of the various
Table 7.10 International differences in the usefulness of analysis techniques
Asia Pacific Emerging
Europe region US and Canada markets
Mean Mean Mean Mean
Fundamental analysis
4.74 4.78 4.86 4.86
Ratio analysis 4.29 4.22 4.41 4.38
Assessment of management
4.14 4.33 4.28 4.07
DCF 3.07 3.25 3.15 3.23
EVA 3.06 3.21 2.71 3.14
Top-down 3.09 3.32 2.93 3.64
Technical analysis
2.56 2.44 2.90 3.14
Beta analysis 2.03 2.38 2.45 2.13
techniques adopted in the analysis of companies in Europe, Asia (including Japan), North America and emerging markets.
The results demonstrate that the fundamental approach remains dom- inant across all geographic regions. Its constituents of ratio analysis and assessment of management are also highly regarded, although ratios are used marginally less for companies in the Asia-Pacific region. Analysts and fund managers who followed Japanese companies expressed reservations over the credibility of some ratios, particularly because of acute problems of asset undervaluation. Managerial assessments are used less for compan- ies in emerging markets, which may reflect difficulties in getting access to managers as pointed out by some fund managers in the interviews. Inter- estingly, top-down analysis and DCF techniques are most useful in Asian and emerging markets, possibly reflecting poorer accounting disclosures.
Overall, Table 7.10 indicates that there is a high degree of similarity in the usefulness of all the techniques. The only two cases where statistically significant differences emerge between the regions in Kruskal-Wallis tests were for beta analysis and technical analysis. Although beta analysis is the least useful technique to all groups, it appears to be more useful in American company analysis. Similarly, technical analysis is most influential in the US and Canada. This result may be attributable to data availability in this region, i.e., an area characterised by particularly highly-developed stock markets, with high-frequency individual share and index data. Countries in emerging markets will typically not have such data readily available,
although this is changing. Overall, however, the questionnaire data indicates that there is little international variation in the techniques used to analyse overseas companies; fundamental analysis is by far the most commonly used technique in developed and emerging markets.
The interview data, on the other hand, did point to some differences in the approach used to analyse companies between regions – sometimes within the fundamental approach. One manager of an Asian fund (Fund Manager 1) noted that the income statement is used less than the balance sheet in the analysis of some Asian companies. Also, Fund Manager 10, an emerging markets fund manager, described how DCF and top-down analysis were used largely due to a lack of availability of accounting information;
this contrasted with a far more systematic fundamental approach used by him when he was in a previous job, responsible for managing a US fund.
7.5 DIFFERENCES BETWEEN TRANSNATIONAL