An Input-Based Measure of Financial Statement Comparability

We propose a new input-based measure of financial statement comparability (FSC) that captures the degree of overlap in the financial statement line items reported by industry peers. FSC quantifies the extent to which peer firms have similar economic events and accounting transactions as reflected in their financial statements. We validate FSC by showing its use in benchmarking exercises by corporate boards and financial analysts. We then exploit a unique feature of our measure, namely that it allows us to construct finer FSC measures such as income statement versus balance sheet comparability. We show that income statement comparability is particularly useful when forecasting earnings, whereas balance sheet comparability is more important when forecasting balance sheet items such as debt and when assessing credit risk. Our results show that different components of FSC are beneficial in different contexts and for different financial statement users.