Financial Statement Comparability: Theory and Evidence

43 Pages Posted: 25 Oct 2016 Last revised: 31 Jan 2019

See all articles by Vivian W. Fang

Vivian W. Fang

University of Minnesota - Twin Cities - Department of Accounting

Michael Iselin

University of Minnesota - Twin Cities - Department of Accounting

Gaoqing Zhang

University of Minnesota

Date Written: January 29, 2019

Abstract

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

Fang, Vivian W. and Iselin, Michael and Zhang, Gaoqing, Financial Statement Comparability: Theory and Evidence (January 29, 2019). 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 - Department of Accounting ( email )

321 19th Avenue South
Room 3-109
Minneapolis, MN 55455
United States

HOME PAGE: http://www.vivianfang.org

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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