Comparability and Cost of Equity Capital

Posted: 29 Sep 2016 Last revised: 18 Aug 2017

See all articles by Michael Imhof

Michael Imhof

Wichita State University - Barton School of Accountancy

Scott Seavey

Florida Atlantic University - School of Accounting

David B. Smith

University of Nebraska at Lincoln - School of Accountancy

Date Written: December 2, 2016

Abstract

We investigate how the comparability of a company’s financial statements is related to its cost of equity capital. Financial Accounting Standards Board’s (FASB) Concept Statement No. 8 proposes that comparability is a key tenet of accounting because it allows users of financial statements to benchmark a firm against similar firms when distinguishing between alternative investment opportunities. We provide evidence that greater financial statement comparability is associated with lower cost of equity capital, and show that comparability’s effect on cost of equity remains after controlling for within-firm accounting quality. Additionally, we find that investors derive greater benefits from financial statement comparability in firms whose information environments are less transparent (high information asymmetry) and whose equity shares trade in markets that are less competitive (imperfect markets). Our findings contribute to accounting research by providing evidence justifying comparability as a separate element of the FASB’s conceptual framework.

Keywords: Financial Statement Comparability, Cost of Equity Capital, Information Risk, Information Asymmetry, Market Imperfection

JEL Classification: M41

Suggested Citation

Imhof, Michael and Seavey, Scott and Smith, David B., Comparability and Cost of Equity Capital (December 2, 2016). Accounting Horizons, Vol. 31 No. 2, 2017, Available at SSRN: https://ssrn.com/abstract=2844991 or http://dx.doi.org/10.2139/ssrn.2844991

Michael Imhof (Contact Author)

Wichita State University - Barton School of Accountancy ( email )

United States

Scott Seavey

Florida Atlantic University - School of Accounting ( email )

University Tower
220 SE 2 Avenue
Boca Raton, FL 33431
United States

David B. Smith

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,583
PlumX Metrics