Accounting Comparability and the Value Relevance of Earnings and Book Value
Journal of Corporate Accounting & Finance, Forthcoming
39 Pages Posted: 8 Jul 2020 Last revised: 15 Jul 2020
Date Written: June 15, 2020
The value relevance of financial statements is of great significance to investors and standard setters. The present research examines whether accounting comparability among industry peers enhances the value relevance of earnings and book value. This is an important question because both the Financial Accounting Standards Board and the Securities Exchange Commission seek greater comparability in financial reporting. However, there is limited empirical evidence on how comparability affects the value relevance of accounting information in the U.S. Our results show that accounting comparability increases the value relevance of earnings, but not book value. That is, when firms exhibit greater accounting comparability vis-à-vis industry peers, investors attach higher value to reported earnings. In terms of economic significance, the value relevance of earnings is 25.2 percent higher when accounting comparability is higher by one standard deviation. However, the incremental benefits of accounting comparability are attenuated when financial reporting opacity is high or when there exists an internal control material weakness over financial reporting. In contrast, comparability benefits are enhanced when an industry specialist auditor is employed. Our results are robust to using different model specifications.
Keywords: Value Relevance, Accounting Comparability, Financial Reporting Opacity, Internal Controls, Specialist Auditors
JEL Classification: G14, M41
Suggested Citation: Suggested Citation