Hierarchical Standard Setting and Accounting Comparability

Abstract

This paper studies hierarchical standard setting processes where the international and national standard setters respectively choose cross- and within-country accounting comparability. Modeling comparability as the proportion of common measurement errors in firms' accounting reports, within- and cross-country comparability interact through country-level common errors and are complements. In equilibrium, within-country comparability may be non-monotonic in the strength of reporting institutions. Fundamental characteristics of one country may have a spillover effect on comparability of other countries through international comparability. More broadly, this framework also applies to other hierarchical standard setting processes such as the design of industry-specific guidance on the generally accepted reporting rules.

Keywords: accounting comparability, accounting harmonization, standard setting hierarchy, measurement error, information externality

JEL Classification: G12, G14, G18, M41, M48