Comparability and Cost of Equity Capital

SYNOPSIS

We investigate how the comparability of a company's financial statements is related to its cost of equity capital. The Financial Accounting Standards Board's (FASB 2010) Statement of Financial Accounting Concept No. 8 proposes that comparability is a key tenet of accounting because it allows users of financial statements to benchmark a firm against similar firms when distinguishing between alternative investment opportunities. We provide evidence that greater financial statement comparability is associated with lower cost of equity capital, and show that comparability's effect on cost of equity remains after controlling for within-firm accounting quality. Additionally, we find that investors derive greater benefits from financial statement comparability in firms whose information environments are less transparent (high information asymmetry) and whose equity shares trade in markets that are less competitive (imperfect markets). Our findings contribute to accounting research by providing evidence justifying comparability as a separate element of the FASB's conceptual framework.

Keywords: financial statement comparability, cost of equity capital, information risk, information asymmetry, market imperfection.

Article Citation:
Michael J Imhof, Scott E. Seavey, and David B. Smith (2017) Comparability and Cost of Equity Capital. Accounting Horizons: June 2017, Vol. 31, No. 2, pp. 125-138.