CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

Which of the following least accounts for the differences in cross-border valuation of otherwise identical companies?

A. Differences in the accounting methods that are available.
B. Differences in the degree of securities regulation.
C. Cultural differences.
D. Differences in the stage of the economic cycle.
Correct Answer: B

While the degree of securities regulation certainly affects areas such as the quality of earnings reported, it pales in comparison when one examines the other factors.

User Contributed Comments 5

User Comment
george2006 B might have less impact than A and D. But Comparing the impacts from B and C, I would argue that difference in securities regulation have a higher degree of impact on the company's operation/profitability than the mere cultural difference.
krisscfa Wt is Cultural Difference ??...wt does it do the valuation??
pjdeschenes If you assume that the majority of investors in a given country's stocks are residents of that country, then cultural differences impact the market risk premium, which impacts the expected return and therefore value of stocks.
davidt876 ut then surely it's the demographics of shareholders that accounts for the difference in risk premium? i mean i see what you're saying, but really? cultural differences affect valuations more than the degree of securities regulation?

from experience, undeveloped stock markets are ripe with manipulation and this scares off a lot of potential investors - both foreign and unsophisticated investors - driving up the risk premium, simultaneously drying up liquidity, and ultimately suppressing prices in a very real way.

you could also argue that manipulation (or a lack of regulation) has an impact on saving and investing behaviour and therefore regulation has an impact on culture. furthermore confidence in the market's regulatory framework attracts foreign investment thereby changing the demographics of the shareholders altogether (and therefore the 'culture' of the market)... so is it really cultural differences that are having the impact?
giovannig @david, well thought argument, but cultural differences above all else would even affect securities regulation, or lack thereof.
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