Financial Statement Dissimilarity and SEC Scrutiny
61 Pages Posted: 30 May 2019 Last revised: 8 May 2020
Date Written: May 7, 2019
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: Suggested Citation