The Effect of Financial Statement Comparability on Divergence of Opinion among Investors

Abstract

This study investigates the effect of financial statement comparability on the divergence of opinion among investors in Korea. As prior research shows that the behavior of investors is different from that of analysts, we further examine whether investors will respond differently to comparability, as analysts do. Specifically, we focus on the investor and empirically test for associations between measures of financial statement comparability and measures of investors` uncertainty regarding the information conveyed in financial statements. Comparable financial statements allow investors to better interpret financial statement information with lower costs by enabling them to identify similarities and differences among a firm`s economic events, thus better anticipating the future performance of the firm. Investors perceive lower comparability to be an indicator of greater uncertainty regarding future earnings forecasts, resulting in a greater disagreement among investors. We use De Franco et al. (2011)`s measure of comparability based on the distance between accounting earnings for two firms with identical economic events. We use Com prix et al. (2011) and Kim et al. (2012)`s measures of investor uncertainty. They are: (1) share turnover, (2) unexpected share turnover, (3) return volatility, (4) unexpected return volatility, and (5) analysts` forecast dispersion. To test the association between comparability and divergence of opinion among investors, we collected data listed in the Korean Stock Exchange from 2003 to 2011 fiscal year. Using 4,092 firm-year observations, the result supports the hypothesis that financial statement comparability is negatively associated with divergence of opinion among investors. High comparable financial statements make it possible for information users to better interpret financial statement information with lower costs and decrease the divergence of opinion among investors. This study contributes to the literature on accounting and divergence of opinion in Korea from an investor`s perspective, and to the growing literature that examines the benefits of financial statement comparability by providing evidence that investors respond differently to comparability as analysts do, and reduce divergence of opinion among investors in Korea. This study also provides direct evidence supporting the IFRS`s (2010) assertion that comparability enhances the decision usefulness of accounting information.