Financial Statement Dissimilarity and SEC Scrutiny

61 Pages Posted: 30 May 2019 Last revised: 8 May 2020

See all articles by Stephen V. Brown

Stephen V. Brown

University of Connecticut - Department of Accounting

Guang Ma

McGill University - Desautels Faculty of Management

Jenny Wu Tucker

University of Florida - Warrington College of Business Administration

Date Written: May 7, 2019

Abstract

Based on behavioral economic and psychological theories, we predict that firms with financial statements that are more dissimilar from their industry peers’ or their own past are more likely to draw scrutiny from the SEC. To test this prediction, we first construct measures of financial statement peer-to-peer similarity and year-over-year similarity. We find that firms with lower financial statement similarity are more likely to receive comment letters from the SEC’s review process about their annual reports, especially on financial statement issues. Firms with lower financial statement similarity are also more likely to be under SEC investigation for securities law violations. We decompose peer-to-peer dissimilarity into the predicted portion—explained by a firm’s business model, economic performance, and accounting policy factors—and the residual portion, and find that even the predicted portion is associated with an increased number of comments and likelihood of SEC investigations. The findings suggest that financial statement dissimilarity results in extra compliance cost for firms. Our study has implications for managers, regulators, and investors.

Keywords: financial statement similarity; SEC scrutiny; comment letter; comparability.

JEL Classification: [M41, G38]

Suggested Citation

Brown, Stephen V. and Ma, Guang and Tucker, Jenny Wu, Financial Statement Dissimilarity and SEC Scrutiny (May 7, 2019). Available at SSRN: https://ssrn.com/abstract=3384394 or http://dx.doi.org/10.2139/ssrn.3384394

Stephen V. Brown

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

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

Guang Ma

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St W
Montreal, Quebec h3A 1G5
514-398-5075 (Phone)

HOME PAGE: http://guangma.info

Jenny Wu Tucker (Contact Author)

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States
352-273-0214 (Phone)
352-392-7962 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
297
Abstract Views
1,279
rank
112,012
PlumX Metrics