International Equity Valuation: The Relative Importance of Country and Industry Factors Versus Company‐Specific Financial Reporting Information

The relative importance of country- and industry-specified factors vis-a-vis company-specific financial-statement-based information in explaining equity valuation multiples in an international setting is examined. Both country-specific effects via previously identified variables and an indicator variable approach are analyzed. While company-specific factors are predominant in explaining cross-sectional differences in valuation, country and industry factors have sizable incremental explanatory power over them; the latter are not independent so their relative importance is influenced by how we adjust for this commonality. Using country-indicators provides larger incremental explanatory power than using country-specific factors suggesting that previously identified factors may be measured with sizeable error or omitted factors are important.