Do Compustat Financial Statement Data Articulate?

Abstract

Using the Financial Statement Balancing Model (FSBM) from Compustat, we examine whether financial statement data articulate for 10,681 U.S. non-financial firms for 24 years, a total of 92,951 firm years. We accomplish three specific research goals. First, we build the first formal model of financial statement articulation, providing a benchmark for subsequent discussions of articulation. Second, we show how to handle missing data to ensure articulation, by either filling in zeros or backing out the missing data with other variables in the equations. Third, we produce modified variables that resolve exceptions in the articulating equations, so that these variables form relations that are consistent across time and firms. We then compare the “modified database” (MDB) using these updated variables with the original Compustat data, and find significant differences in many commonly used financial variables, such as the Altman’s z-score, and the disclosure quality based on non-missing Compustat variables. We believe that our MDB has the potential to increase sample size and the accuracy of data in empirical studies, which could help researchers draw improved inferences.

Keywords: financial statement articulation; data integrity; data errors; Compustat