Consistency As A Means to Comparability: Theory and Evidence

51 Pages Posted: 25 Oct 2016 Last revised: 23 Jan 2021

See all articles by Vivian W. Fang

Vivian W. Fang

University of Minnesota - Twin Cities - Carlson School of Management; European Corporate Governance Institute (ECGI)

Michael Iselin

University of Minnesota - Twin Cities - Department of Accounting

Gaoqing Zhang

University of Minnesota

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). Available at SSRN: https://ssrn.com/abstract=2858301 or http://dx.doi.org/10.2139/ssrn.2858301

Vivian W. Fang (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

European Corporate Governance Institute (ECGI) ( email )

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

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 ( email )

321 19th Avenue South
Minneapolis, MN 55455
United States

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