Product Market Competition and Financial Reporting Comparability

• In Event: Auditing Research

Abstract

Abstract: This study examines how a firm’s competitive environment shapes the comparability of its financial reporting. We address comparability from two different aspects. First we examine financial statement comparability, which reflects the closeness of mapping of accounting earnings to returns and closeness of accruals between two firms. Second, we examine textual comparability, which reflects the closeness of annual report length and readability between two firms. We find that higher product market competition, measured as the change in competitive threats by rival firms, results in lower financial statement comparability, but higher textual comparability. The implication of our study is that firms may react to competitive threats by reducing idiosyncrasies in their discussion of proprietary events in the textual portion of the financial statements, but are more restricted by GAAP in how they treat the transactional component of proprietary investments, such that financial reporting comparability with peer firms decreases.

Authors

• Scott E Seavey, University of Nebraska-Lincoln

• Olena Victoria Watanabe, Iowa State University