Financial Statement Comparability: Theory and Evidence
43 Pages Posted: 25 Oct 2016 Last revised: 31 Jan 2019
Date Written: January 29, 2019
This paper studies financial statement comparability from an information perspective. We model comparability as firms' required propensity to apply common accounting methods to individual transactions, and show that it creates information spillover through correlated measurements ("spillover channel") while potentially reducing one's own reporting precision ("standalone channel"). The model generates two central predictions. First, optimal comparability decreases with a transaction's fundamental correlation as high correlation diminishes information gains via the spillover channel. Second, optimal comparability decreases with a transaction's fundamental volatility as high volatility exacerbates information losses via the standalone channel. Empirical evidence supports these predictions. Overall, this paper contributes a framework for studying comparability and draws useful policy implications.
Keywords: Financial Statement Comparability; Reporting Precision; Information Spillover; Fundamental Correlation; Fundamental Volatility
JEL Classification: G14; G18; M40; M41; M48
Suggested Citation: Suggested Citation