When Does Comparability Better Enhance Relevance? Policy Implications from Empirical Evidence

54 Pages Posted: 22 Aug 2018

See all articles by Robert Kim

Robert Kim

University of Massachusetts Boston

Sangwan Kim

University of Massachusetts Boston

Prianka Musa

University of Massachusetts Boston

Date Written: July 24, 2018

Abstract

This study investigates the user-specific contexts under which comparability better enhances relevance of accounting information. We first confirm the intuition in the FASB’s (2010) current conceptual framework by documenting that the short-window earnings response coefficient (ERC) is positively associated with the pre-determined level of comparability. Using the cross-sectional variation in the positive relation between ERC and comparability, we show that the link between ERC and comparability is more pronounced for firms with higher investor sophistication and lower information asymmetry among investors. We further support our predictions using analysts’ earnings forecast revisions and various alternative measures of earnings informativeness. In sum, our paper shows that comparability improves information users’ ability to identify similarities and differences across different firms to a greater extent when investor base is more sophisticated and private information is less prevalent. These results suggest that standard setters, regulators, and practitioners should devote more attention to the role of comparability in firms whose investors are less sophisticated and information environment is more opaque.

Keywords: conceptual framework, comparability, relevance, investor sophistication, information asymmetry

JEL Classification: G14, M41

Suggested Citation

Kim, Robert G. and Kim, Sangwan and Musa, Prianka, When Does Comparability Better Enhance Relevance? Policy Implications from Empirical Evidence (July 24, 2018). Journal of Accounting and Public Policy, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3229040

Robert G. Kim

University of Massachusetts Boston ( email )

100 Morrissey Blvd.
College of Management
Boston, MA 02125
United States

HOME PAGE: http://ssrn.com/author=1376774

Sangwan Kim (Contact Author)

University of Massachusetts Boston ( email )

100 Morrissey Blvd.
Boston, MA 02125
United States

Prianka Musa

University of Massachusetts Boston ( email )

100 William T Morrissey Blvd
Boston, MA 02125
United States

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