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Consistency as a Means to Comparability: Theory and Evidence

Author

Listed:
  • 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)

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.

Suggested Citation

  • Vivian W. Fang & Michael Iselin & Gaoqing Zhang, 2022. "Consistency as a Means to Comparability: Theory and Evidence," Management Science, INFORMS, vol. 68(6), pages 4279-4300, June.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:6:p:4279-4300
    DOI: 10.1287/mnsc.2021.4052
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    References listed on IDEAS

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