Global Accounting Standards, Financial Statement Comparability, and the Cost of Capital

33 Pages Posted: 13 Jan 2020 Last revised: 1 Jul 2020

See all articles by Yong Huang

Yong Huang

School of Accounting, Zhongnan University of Economics and Law

Chao Yan

Zhongnan University of Economics and Law - School of Accounting

Date Written: February 13, 2020

Abstract

This paper studies how financial statement comparability affects the cost of capital and investor welfare. We show that the cost of capital decreases with comparability if and only if the quality of accounting standards is sufficiently high, thus supporting the relative importance of comparability as proposed in the Conceptual Framework. We also find that current investors and new investors have different demands for comparability. The welfare of current investors increases in comparability, while the welfare of new investors decreases in comparability. Moreover, the effects of comparability on the cost of capital and investor welfare are enhanced when firms’ idiosyncratic accounting measurements are highly volatile and/or correlated. These basic findings hold in both an exchange economy and a production economy, but there is a certain threshold of investment cost above which the cost of capital and the welfare of new investors decreases with comparability in a production economy. These findings are helpful in understanding the role of comparability and have implications for the global convergence of accounting standards.

Keywords: Accounting Standards; Comparability; Cost of Capital; Investment; Investor Welfare

JEL Classification: D53; G12; G14; M41; M48

Suggested Citation

Huang, Yong and Yan, Chao, Global Accounting Standards, Financial Statement Comparability, and the Cost of Capital (February 13, 2020). International Review of Economics & Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3500694 or http://dx.doi.org/10.2139/ssrn.3500694

Yong Huang

School of Accounting, Zhongnan University of Economics and Law ( email )

182,Nanhu Road
Hongshan
Wuhan, Hubei 430073
China

Chao Yan (Contact Author)

Zhongnan University of Economics and Law - School of Accounting ( email )

182# Nanhu Avenue
East Lake High-tech Development Zone
Wuhan, Hubei 430073
China

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