Do Firms Mimic Industry Leaders’ Accounting? Evidence from Financial Statement Comparability

Abstract

Following management theory on organizational legitimacy, we predict that managers mimic the accounting of industry leading companies to gain legitimacy. Such demand for legitimacy is expected to be greater for new managers because stakeholders are more uncertain about the managers’ ability. Using a sample of CEO turnovers, we find that a firm has higher financial statement comparability with industry leaders after the new CEO assumes office. This relation is stronger when: i) new managers lack executive experience at larger firms, are younger, or belong to an underrepresented group (i.e, are female or non-white); ii) networks that facilitate imitation are more intense; and, iii) firms’ operating environments are more volatile. Further, increased comparability with industry leaders helps managers gain legitimacy as evidenced by lower analysts’ forecast dispersion and a lower probability of future CEO turnover. These findings support the idea that CEOs’ demand for legitimacy leads to more comparable accounting.

Keywords: Financial Statement Comparability, Institutional Theory, Imitation

JEL Classification: M40, R30