Consistency As A Means to Comparability: Theory and Evidence

Management Science, Forthcoming

51 Pages Posted: 25 Oct 2016 Last revised: 2 Dec 2022

See all articles by Vivian W. Fang

Vivian W. Fang

European Corporate Governance Institute (ECGI); Indiana University

Michael Iselin

University of Minnesota - Twin Cities - Department of Accounting

Gaoqing Zhang

University of Minnesota - Twin Cities - Department of Accounting

Date Written: December 21, 2020

Abstract

This paper studies financial statement consistency--the purported means to comparability--from an information perspective. We model consistency as firms' required propensity to apply common accounting methods to individual transactions, and show that consistency creates information spillover through correlated measurements ("spillover channel") while potentially reducing the informativeness of one's own report ("standalone channel"). The model generates two central predictions. First, optimal consistency decreases with a transaction's fundamental correlation as high correlation diminishes information gains via the spillover channel. Second, optimal consistency decreases with a transaction's fundamental volatility as high volatility exacerbates information losses via the standalone channel. Empirical evidence supports both predictions. Overall, this paper contributes a framework for studying comparability and draws useful policy implications.

Keywords: Financial Statement Consistency; Comparability; Informativeness; Information Spillover; Fundamental Correlation; Fundamental Volatility

JEL Classification: G14; G18; M40; M41; M48

Suggested Citation

Fang, Vivian W. and Iselin, Michael and Zhang, Gaoqing, Consistency As A Means to Comparability: Theory and Evidence (December 21, 2020). Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2858301 or http://dx.doi.org/10.2139/ssrn.2858301

Vivian W. Fang (Contact Author)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Indiana University ( email )

Bloomington, IN 47405
United States
47405 (Fax)

Michael Iselin

University of Minnesota - Twin Cities - Department of Accounting ( email )

271 19th Avenue South
Room 645 Mgt. Econ. Building
Minneapolis, MN 55455
United States

Gaoqing Zhang

University of Minnesota - Twin Cities - Department of Accounting ( email )

321 19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://https://carlsonschool.umn.edu/faculty/gaoqing-zhang

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