Financial statement comparability and credit risk

Investors, financial reporting policymakers, and accounting educators emphasize the importance of financial statement comparability. Accounting researchers have found it difficult to develop empirical measures of comparability that correspond to typical views of the construct. The measures used in recent research are removed from firms’ accounting treatments and are likely to be driven by economic similarity rather than comparability. We fill this gap by measuring comparability as the within-industry variability of Moody’s adjustments to firms’ reported accounting numbers. We examine two sets of adjustments: (1) to the interest coverage ratio and (2) for non-recurring income items. Because Moody’s makes these adjustments for debt-rating purposes, we examine the benefits of comparability for the debt market, distinct from prior research that focuses on the equity market. We provide evidence that comparability is negatively associated with split ratings by credit rating agencies, estimated bid-ask spreads for traded bonds, and credit spreads. Our results are consistent with financial statement comparability reducing debt market participants’ uncertainty about firms’ credit risk.