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Does Financial Statement Comparability Enhance The Usefulness of Earnings? Evidence From Canada

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posted on 2022-01-27, 19:09 authored by Yige Jiang

Building on the comparability construct developed by De Franco, Kothari, and Verdi (2011), the study examines whether the comparability enhances the usefulness – relevance and reliability – of earnings, as suggested in the International Financial Reporting Standards (IFRS) Conceptual Framework. By far, researchers have examined the benefit of comparability from the users’ perspective. However, the relationships between comparability and earnings relevance or earnings reliability have not been directly examined. This paper is motivated to address such a question using Canadian firms’ data in the post-IFRS period to estimate firm-specific comparability, and then to test the roles of comparability in earnings relevance and earnings reliability. The results document that comparability has a significantly positive impact on both relevance and reliability of earnings. Additionally, the study conducts comparability analysis with size and industry effect. Overall, the results are consistent with the prediction, indicating that comparability enhances the decision-usefulness of earnings.