A Measure of Financial Statement Benchmarking

58 Pages Posted: 19 Jul 2018 Last revised: 20 Jan 2022

See all articles by Rani Hoitash

Rani Hoitash

Bentley University - Department of Accountancy

Udi Hoitash

Northeastern University - Accounting Group

Ahmet C. Kurt

Bentley University - Department of Accountancy

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT)

Date Written: December 14, 2021

Abstract

We propose a pairwise measure of financial statement benchmarking (FSB) that captures the degree of overlap in the financial statement line items reported by two firms. We validate FSB by showing its association with actual peer choices by analysts for performance benchmarking and by corporate boards for compensation benchmarking. We then test the practical implications of FSB in the context of strategic peer selection by these parties. We find that analyst (board) chosen peers with low pairwise FSB are more likely to be optimistically (opportunistically) biased and that the set of peers assembled by an analyst (board) collectively having low FSB is associated with more optimistic and less accurate earnings forecasts (higher CEO overpay). We also document that using peers with high FSB increases the explanatory power of peer-based valuation models. Finally, we demonstrate alternative applications of FSB by aggregating the pairwise measure at the firm level as well as decomposing it into finer financial statement-specific components. Our evidence collectively suggests that FSB can be a relevant tool for those who use benchmarking applications, including practitioners and academics.

Keywords: Financial statement benchmarking, Peer benchmarking, Analyst forecasts, CEO compensation, Peer-based valuation, XBRL

JEL Classification: M41

Suggested Citation

Hoitash, Rani and Hoitash, Udi and Kurt, Ahmet C. and Verdi, Rodrigo S., A Measure of Financial Statement Benchmarking (December 14, 2021). Available at SSRN: https://ssrn.com/abstract=3208928 or http://dx.doi.org/10.2139/ssrn.3208928

Rani Hoitash (Contact Author)

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452-4705
United States

HOME PAGE: http://www.xbrlresearch.com

Udi Hoitash

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States
671-373-5839 (Phone)

Ahmet C. Kurt

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
100 Main Street E62-666
Cambridge, MA 02142
United States
(617) 253 2956 (Phone)

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