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Accounting comparability and the value relevance of earnings and book value
Author(s) -
Chen Bingyi,
Kurt Ahmet C.,
Wang Irene Guannan
Publication year - 2020
Publication title -
journal of corporate accounting and finance
Language(s) - English
Resource type - Journals
eISSN - 1097-0053
pISSN - 1044-8136
DOI - 10.1002/jcaf.22459
Subject(s) - comparability , accounting , earnings , value (mathematics) , relevance (law) , accounting standard , business , accounting information system , earnings response coefficient , financial accounting , economics , book value , actuarial science , statistics , political science , mathematics , combinatorics , law
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 United States. 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% 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.