We show harmonizing domestic GAAP with foreign GAAP can have deleterious ef
fects on security market performance, specifically price informativeness an
d trading volume. Harmonization effects result from interaction between two
forces. Direct informational effects depend on whether harmonization incre
ases or decreases GAAP precision. Expertise acquisition effects depend on b
enefits and costs to foreign investors of becoming domestic GAAP experts. T
hese countervailing forces can result in harmonization to more (less) preci
se GAAP increasing (decreasing) or, unexpectedly, decreasing (increasing) p
rice informativeness and trading volume. We also observe this for a cost of
capital metric. Thus, harmonization is not necessarily a desirable singula
r goal. (C) 1999 Elsevier Science B.V. All rights reserved, JEL classificat
ion: D82; G15; M41.