Consistency as a Means to Comparability: Theory and Evidence

Vivian W. Fang (), Michael Iselin () and Gaoqing Zhang ()
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Vivian W. Fang: University of Minnesota, Minneapolis, Minnesota 55455
Michael Iselin: University of Minnesota, Minneapolis, Minnesota 55455
Gaoqing Zhang: University of Minnesota, Minneapolis, Minnesota 55455

Management Science, 2022, vol. 68, issue 6, 4279-4300

Abstract: This paper studies financial statement consistency — the purported means to comparability — from an information perspective. We model consistency as firms’ required propensity to apply common accounting methods to individual transactions and show that consistency creates information spillover through correlated measurements (“spillover channel”) while potentially reducing the informativeness of one’s own report (“standalone channel”). The model generates two central predictions. First, optimal consistency decreases with a transaction’s fundamental correlation as high correlation diminishes information gains via the spillover channel. Second, optimal consistency decreases with a transaction’s fundamental volatility as high volatility exacerbates information losses via the standalone channel. Empirical evidence supports both predictions. Overall, this paper contributes a framework for studying comparability and draws useful policy implications.

Keywords: financial statement consistency; comparability; informativeness; information spillover; fundamental correlation; fundamental volatility (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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