Accounting comparability can be defined as the extent to which the information provided in the financial statements is comparable across different firms and time periods. Comparability plays a crucial role in the agenda of accounting regulators, as highlighted, for example, by the Conceptual Frameworks of the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB). Progress towards international accounting harmonization and widespread adoption of the International Financial Reporting Standards (IFRS) have increased the scope and the depth of the debate (among financial statement users and academics alike) upon accounting comparability. In a recent article, we critically review the academic literature on accounting comparability; we discuss the problem of measurement, the economic determinants and consequences.
We focus on the measures of accounting comparability which are based on the outputs of the financial reporting process (output-based approach). One of the most widely used output-based measures is obtained by examining the similarity with which, across different firms or time periods, changes in accounting performance are related to changes in the market value of equity. This measure has been modified in several ways, for example in order to test whether different economic events are associated with different accounting treatments. Other researchers concentrate on the similarity with which accounting multiples are related to firm characteristics and economic trends. An alternative approach to measuring accounting comparability, which is mainly relevant to debtholders, examines the magnitude and the variability of the adjustments made by Moody’s to published financial statements. We emphasize that one of the most important problems, which is common to the above measures, is that they are also affected by economic comparability, i.e., the similarity with which the cash flows of the company react to economic events. Economic and accounting comparability are different and it is empirically challenging to disentangle these two concepts.
Most research documents a gradual increase in cross-country accounting comparability before the years 2000s and a marked increase after IFRS adoption, which, for companies listed in the EU, became mandatory in 2005. Interestingly, some scholars question the claim that IFRS led to an increase in accounting comparability; they show that there is a broad cross-sectional variation in the comparability changes after IFRS adoption and highlight, e.g., the importance of examining compliance incentives to fully understand the effect of the introduction of the new standards.
Accounting comparability has been shown to have several positive economic effects for companies and investors. Notably, financial analysts’ behavior and the effectiveness of their forecasts are affected by comparability. In particular, firms with more comparable financial statements display higher accuracy of analysts’ earnings forecast and stock price valuation, have a greater number of analysts following them, and have lower forecast dispersion among the analysts’ earnings forecasts. On a related note, the perceived risk of crash in equity values is lower for more comparable firms. In addition, the acquisition efficiency, defined as the profitability of the acquisition for the acquirer, is higher when the comparability between the acquisition target and its industry peers is more pronounced. Other studies examine the effects of comparability from the point of view of debt markets. It has been found that comparability is negatively associated with the cost of both public and private debt, which is consistent with the interpretation that accounting comparability improves the quality of the information environment. Another field of research investigates the effect of changes in comparability due to IRFS adoption. Most of these works find that IFRS brought about capital market benefits through the channel of increased comparability.
We believe that our article is relevant to academics, investors, issuers of equity and debt instruments, and accounting regulators. Academics will find suggestions to identify new research questions and to appropriately measure comparability in empirical studies. Investors and issuers may find our discussion useful to understand the role of accounting comparability in financial markets. Our work can also help accounting regulators in the standard setting process and in the post-implementation review of their policies.
Pietro Perotti is a lecturer in accounting and finance at the School of Management of the University of Bath. He holds a PhD from Bocconi University. Pietro’s main research interests include: the capital market effects of accounting information, financial reporting quality, the role of accounting information in credit markets, and market microstructure.
Reference of the article: Gross, C., Perotti, P. (2017). Output-Based Measurement of Accounting Comparability: A Survey of Empirical Proxies. Journal of Accounting Literature 39, December 2017, pp. 1-82.