A Model for Measuring the Comparability of Financial Statements Based on the Relative Valuation Theory

Document Type : Research Paper

Authors

1 PhD Candidate, Department of Accounting, Bonab Branch, Islamic Azad University, Bonab, Iran.

2 Associate Prof., Department of Accounting, Bonab Branch, Islamic Azad University, Bonab, Iran.

3 Associate Prof., Department of Accounting, Tabriz Branch, Islamic Azad University, Tabriz, Iran.

4 Assistant Prof., Department of Accounting, Bonab Branch, Islamic Azad University, Bonab, Iran.

Abstract

Objective: Several stakeholders such as investors, regulators, and researchers all emphasize the importanceoffinancial statement comparability. However, few empirical methods have been developed for measuring financial statement comparability. The main aim of this study is to develop a suitable model for measuring financial statements comparability.
Methods: In order to achieve the goal of the research by relying on the relative valuation theory, the output-based measurement models of de facto financial statements comparability is proposed by using the data gathered from 194 firms during the period of 2009 to 2018.
Results: The research findings show that the new model presented in this study have more explanatory power in comparison with the models proposed by De franco, Kothari & Verdi (2011), which were previously the common pattern for measuring the comparability of financial statements. Among the five versions of selected model, the stock price on earnings per share ratio, stock price on book value per share ratio, stock price at the beginning of the period on earnings per share ratio and the stock price on net sale per share ratio are respectively in the next ranks after the version based on the stock price to operating profit per share ratio, which has the highest explanatory power and the best measurement model according to the validation test results. The research findings in the validation test section also show that the financial statements comparabilitymeasured by all version model based on relative valuation theory has a negative impact on information asymmetry and the idiosyncratic risk, and it has a positive effect on the created shareholders value.
Conclusion: The objective of general-purpose financial reporting is to provide users with information that enables them to assess the amount, timing, and uncertainty of a firm’s future net cash flow. Comparability is a unique qualitative characteristic of financial information that enhances its usefulness. Comparability enables users to make sharper inferences about economic similarities and differences across comparable firms so that investors can better understand and evaluate firm performance. Comparability is particularly important to investors in the equity and debt markets, since their investing and lending decisions essentially involve evaluations of alternative opportunities or projects and these decisions cannot be made without comparable information. Therefore, firm’s financial reporting comparability can lower users’ information acquisition and processing costs and increase the quality of financial information. The model presented in this study, by removing some limitations of previous models, has considered more comprehensive dimensions of the comparability of financial statements. The use of  this model drives the decisions of capital market activists more and more towards fundamental analysis and increases the efficiency of the capital market.

Keywords

References

Afza, T., & Tahir, S. (2012). Determinants of price earnings ratio. International journal of academic research in business and social science, 2(8), 331-343.
Anderson, K., & Brooks, C. (2006). Decomposing the Price-Earnings Ratio. Journal of Asset Management, 6(6), 456-469.
Arslan, H., Iltas, Y., & Kayhan, T. (2017). Target P/E ratio determinants in the Turkish Stock Market: Earning volatility effect. Theoretical and Applied Economics, 24(4), 65-74.
Babajani, J., Tahriri, A., Saqafi, A., & Badri, A. (2015). Information Asymmetry and Earnings Management: Evidence from Companies Listed on Tehran Stock Exchange. Journal of Accounting Advances, 6(2), 1-26. (in Persian)
Badavar Nahandi, Y., Babaei, G. (2019). The relationship between financial statements comparability and stock price crash risk with an emphasis on the role of information asymmetry. Applied Research in Financial Reporting, 8(1), 173-206. (in Persian)
Baradaran Hassanzadeh, R., Badavar Nahandi, Y., & Hossein Babaei, G. (2012). A Survey of the Relationship between Corporate Governance with Created Shareholder Value (CSV) and Economic Value Added (EVA). Accounting and Auditing Review, 19(2), 1-16.
(in Persian)
Barth, M., Landsman, W., Lang, M., & Williams, C. (2013). Effects on comparability and capital market benefits of voluntary adoption of IFRS by US firms: Insights from voluntary adoption of IFRS by non-US firms. Working paper 3074, Stanford University.
Bhadu, S. K., & Warne, D.P. (2009). Parametric determinants of price-earnings ratio in Indian capital markets. The IUP Journal of Applied Finance, 15(9), 63–82.
Bhattacharyya, S., & Saxena, A. (2009). Does the Firm Size Matter? An Empirical Enquiry into the Performance of Indian Manufacturing Firms. MPRA Paper 13029, Munich University.
Bhojraj, S., & Lee, C. M. C. (2002). Who Is My Peer? A Valuation-Based Approach to the Selection of Comparable Firms. Journal of Accounting Research, 40(2), 407–439.
Brochet, F., Jagolinzer, A. D., & Riedl, E. (2013). Mandatory IFRS Adoption and Financial Statement Comparability. Contemporary Accounting Research, 30(4), 1373–1400.
Cascino, S., & Gassen, J. (2015). What Drives the Comparability Effect of Mandatory IFRS Adoption? Review of Accounting Studies, 20(1), 242–282.
Chen, C., Collins, D. W., Kravet, T. D., & Mergenthaler, R. D. (2018). Financial Statement Comparability and the Efficiency of Acquisition Decisions. Contemporary Accounting Research, 35(1), 164-202.
Chen, C., Huang, A., & Jha, R. (2012). Idiosyncratic Return Volatility and the Information Quality Underlying Managerial Discretion. The Journal of Financial and Quantitative Analysis, 47(4), 873-899.
Chircop, J., Collins, D. W., Hass, L. H., & Nguyen, N.Q. (2019). Accounting Comparability and Corporate Innovative Efficiency. The Accounting Review, doi: 10.2308/accr-52609.
Constand, R. L., Freitas, L. P., & Sullivan, M. J. (1991). Factors Affecting Price Earnings Ratios and Market Values of Japanese Firms. Financial Management, 20(4), 68-79.
Damodaran, A. (2002). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Translation by Amin Investment Bank (2019). Tehran: Keyhan. (in Persian)
De Franco, G., Kothari, S. P., & Verdi, R. S. (2011). The benefits of financial statement comparability. Journal of Accounting Research, 49(4), 895-931.
Debasis Dutta, K., Saha, M., & Chandra Das, D. (2018). Determinants of P/E Ratio: An Empirical Study on Listed Manufacturing Companies in DSE. International Journal of Scientific and Research Publications, 8(4), 167-174.
Emudainohwo, O.B. (2017). Determinants of price-earnings ratio: Nigerian experience (Quantile regression). International Journal of Economics, Business and Management Research, 1(5), 46-76.
Emudainohwo, O.B. & Tarurhor, M.E. (2016). Accounting Information Impacts on Market Value of Equity: Nigeria Experience. Journal of Management Sciences, 7(2), 70–82.
Endrawes, M., Feng, Z., Lu, M., & Shan, Y. (2018). Audit committee characteristics and financial statement comparability. Accounting & Finance. doi:10.1111/acfi.12354.
Engelberg, J., Ozoguz, A., & Wang, S. (2018). Know Thy Neighbor: Industry Clusters, Information Spillovers, and Market Efficiency. Journal of Financial and Quantitative Analysis, 53(5), 1937-1961.
Fernandez, P. (2002), A definition of shareholder value creation, San dego (CA): IESE Business School academic press.
Financial Accounting Standards Board. (2010). Statement of Financial Accounting Concepts No.8, http://www.fasb.org/jsp/FASB/Page/PreCodSectionPage&cid=1 176156317989.
Francis, J. R., Pinnuck, M.L., & Watanabe, O. (2014), Auditor Style and Financial Statement Comparability. The Accounting Review, 89(2), 605–633.
Foroghi, D., Ghasemzad, P. (2016). The effect of financial statement comparability on future earnings response coefficients. Accounting and Auditing Review, 22(4), 479-500.
(in Persian)
Gaio, C., & Raposo, C. (2010). Earnings Quality and Firm Valuation: International Evidence. Accounting and Finance, 51(2), 467-499.
Gebhardt, W. R., Lee, C. M. C., & Swaminathan, B. (2001). Toward an Implied Cost of Capital. Journal of Accounting Research, 39(1), 135–176.
Giroud, X., & Mueller, H. M. (2010). Does corporate governance matter in competitive industries? Journal of Financial Economics, 95(3), 312-331.
Giroud, X., & Mueller, H. M. (2011). Corporate governance, product market competition, and equity prices. The Journal of Finance, 66(2), 563-600.
Gross, C., & Perotti, P. (2017). Output-based measurement of accounting comparability: A survey of empirical proxies. Journal of Accounting Literature, 39, 1-22.
Habib, A., Monzur Hasan, M., & Al-hadi, A. (2018). Financial Statement Comparability and Idiosyncratic Return Volatility. International Review of Finance, 18(3), 1-31.
Hajiha, Z., & Chenari Booket, H. (2017). Financial Statements Comparability and Real Earnings Management. Journal of Financial Accounting Research, 9(3), 33-48.
(in Persian)
Hashemi Dehchi, M., Izadinia, N., Amiri, H. (2020). The Effect of Financial Statement Comparability on the Relevance of Accounting Information with Emphasis on the Role of Sophistication Investors and Information Asymmetry. Accounting and Auditing Review, 27(3), 473-494. (in Persian)
Hayn, C. (1995). The Information Content of Losses. Journal of Accounting and Economics, 20(2), 125–153.
Horton, J., Serafeim, G., & Serafeim, I. (2013). Does mandatory IFRS adoption improve the information environment? Contemporary Accounting Research, 30(1), 388-423.
Huang, A. G., & Wirjanto, T. S. (2012). Is China’s P/E ratio too low? Examining the role of earnings volatility. Pacific-Basin Finance Journal, 20(1), 41-61.
Jain, P.C., & Rosett, J.G. (2006). Macroeconomic variables and the E/P ratio: Is inflation really positively associated with the E/P ratio? Review of Quantitative Finance and Accounting, 27(1), 5–26. (in Persian)
Jitmaneeroj, B. (2017). The impact of dividend policy on price-earnings ratio: the role of conditional and nonlinear relationship. Review of Accounting and Finance, 16(1), 1-23.
Kane, A., Marcus, A.J., & Noh, J. (1996). The P/E multiple and market volatility. Financial Analysts Journal, 52(4), 16–24.
Khazaei, M., Zalaghi, H., Aflatooni, A. (2019). Impacts of Management Ability on of Financial Statement Comparability. The Journal of Accounting Knowledge, 10(2), 21-42.
(in Persian)
Kim, J., Kim, R., & Kim, S. (2020). Does financial statement comparability mitigate delayed trading volume before earnings announcements? Journal of Business Research, 107, 62–75.
Kim, J.-B., Li, Y., & Zhang, L. (2011). Corporate tax avoidance and stock price crash risk: Firm level analysis. Journal of Financial Economics, 100(3), 639-662.
Kim, J-B., Li, L., Yi Lu, L., &Yu, Y. (2016). Financial statement comparability and expected crash risk. Journal of Accounting and Economics, 61(2-3), 294–312.
Kim, S., & Lim, C.S. (2017). Earnings comparability and informed trading. Finance Research Letters, 20,130–136.
Kim, S., Kraft, P., & Ryan, S. G. (2013). Financial Statement Comparability and Credit Risk. Review of Accounting Studies, 18, 783–823.
Kordestani, G., & Tatli, R. (2014). The Evaluation of prediction ability of Bankruptcy models: primary versus adjusted models. Journal of audit science, 14(55), 51-70. (in Persian)
Kumar, B.R. (2015). Determinants of value creation: An empirical examination from UAE market. International Journal of Economics and Financial, 5(1), 75–85.
Kvaal, E., & Nobes, C. (2012). IFRS Policy Changes and the Continuation of National Patterns of IFRS Practice. European Accounting Review, 21(2), 71–343.
Lang, M., Maffett, M., & Owens, E. (2010). Earnings comovement and accounting comparability: The effects of mandatory IFRS adoption. Working paper, University of North Carolina at Chapel Hill.
Leuz, C., & Verrecchia, R.E. (2005). Firms’ capital allocation choices, information quality, and the cost of capital. Working paper, University of Pennsylvania.
Majeed, M.A., Yan, C., & Tauni, M.Z. (2018). How does competition shape managerial decisions? Product market competition and financial statement comparability. Management Decision, 56(11), 2437-2471.
Mehrani, K., Mehrani, K., & Mir Sanei. (2016). Stock valuation. Tehran: Mehraban.
(in Persian)
Nikbakht, E., & Polat, C. (1998). A Global Perspective of P/E Ratio Determinants: The Case of ADRS. Global Finance Journal, 9(2), 253-267.
Niresh A.J., &Velnampy, T. (2014). Firm size and profitability: a study of listed manufacturing firms in Sri Lanka. International Journal of Business and Management, 9(4), 57–64.
Park, D. (2013). Accrual and Cash Flow Comparability: Evidence from Stock Analysts and Credit Rating Agencies. PhD Thesis, The Ohio State University.
Pástor, L., & Veronesi, P. (2003). Stock valuation and learning about profitability. Journal of Finance, 58(5), 1749-1789.
Premkanth, P. (2013). Determinant of price earning multiple in Sri Lanka listed companies. European Journal of Business and Innovation Research, 1(2), 44–56.
Raei, R., Pouyanfar, A. (2017). Advanced investment management. Tehran: Samt. (in Persian)
Rahmani, A., & Ghashghaei, F. (2018). The Relation between Accounting Comparability and Earning Management. Accounting and Auditing Review, 24(4), 527-550. (in Persian)
Rajgopal, S., & Venkatachalam, M. (2011). Financial Reporting Quality and Idiosyncratic Return Volatility. Journal of Accounting and Economics, 51(1-2), 1–20.
Rashidi Baqhi, M. (2018). Pricing of Information Distribution Based on Comparability and Market Inefficiency. Financial Research Journal, 20(4), 531-553. (in Persian)
Reilly, F.K., Griggs, F.T., & Wong, W. (1983). Determinants of the aggregate stock market earnings multiple. Journal of Portfolio Management, 10(1), 36-45.
Roshan, S.A., Arian, A., Hosseini, S.H., & Darikandeh, A. (2012), 2012). Evaluation of factors affecting price earnings ratio of listed companies in Tehran Stock. Financial Knowledge of Securities Analysis, 5(2), 41-57. (in Persian)
Safari Gerayli, M., & Kiya, A. (2017). Financial Statements Comparability, Accrual-based Earnings Management, Real Earnings Management؛ An empirical test of Tehran Stock Exchange. Journal of Financial Accounting Knowledge, 4(2), 115-137. (in Persian)
Sohn, B.C. (2016). The effect of accounting comparability on the accrual-based and real earnings management. Journal of Accounting and Public Policy, 35(5), 513-539.
Stallings, A.M. (2017). Financial Statement Comparability and Investor Responsiveness to Earnings News. Journal of Accounting and Finance, 17(4), 73-97.
Venkatesh, P.C., & Chiang, R. (1986). Information asymmetry and the dealers bid ask spread: a case study of earnings and dividend announcements. Journal of Finance, 41(5),1089-1102.
Wang, F., Zhang, Z., & Xu, L. (2020). Corporate social responsibility and financial statement comparability: Evidence from China. Corporate Social Responsibility and Environmental Management, 27(3), 1375– 1394.
Wenjing, H. (2008). Price–earnings ratio and influence factors: evidence from China. Master’s Thesis in Accounting and Finance. University of VAASA, Finland.
White, C. B. (2000). What P/E ratio will the U.S. stock market support? Financial Analysts Journal, 56 (6), 30-38.
Yip, W., & Young, D. (2012). Does mandatory IFRS adoption improve information comparability? The Accounting Review, 87(5), 1767-1789.
Zafari, S., Foroughi, D., & Kiani, G. (2019). The Impact of Accounting Comparability and Consistency on Information Asymmetry: A Text Mining Approach. Management Accounting, 12(41), 133-150. (in Persian)
Zalaghi, H., Aflatooni, A., & Khazaei, M. (2017). Investigating the Determinants of Financial Statements Comparability in Tehran Stock Exchange Listed Companies. Quarterly financial accounting journal, 9(35), 1-25. (in Persian)
Zhang, J.H. ‎(2018). Accounting Comparability, Audit Effort, and Audit Outcomes. Contemporary Accounting Research, 35(1), 245-276.
Accounting and Auditing Review
Volume 27, Issue 4
2021
Pages 546-580

Files

Share

How to cite

Statistics