A Study on the Relationship between Accounting Information Comparability and Corporate Risk-taking

Abstract

The higher the level of corporate risk-taking is, the more inclined it is to choose the investment project with a higher risk and positive net present value. This risk selection has a significantly positive effect on corporate value and long-term economic development. However, the excessive and radical risk-taking behavior will not only threaten corporate development, but also bring hidden dangers to the capital market and macro-economy. Therefore, how to encourage corporations to take risks and prevent excessive risk-taking behaviors to avoid economic crisis is an important topic for current corporate finance and capital markets.Limited by the measurement problem, the existing research mainly focuses on the accounting quality attributes, such as accrual quality, smoothness, predictability and robustness, and rarely involves comparability. In recent years, with the innovation of accounting information comparability measurement method, China’s capital market has begun to pay attention to the level of accounting information comparability. Due to the lag of comparability research, there is little attention on how the comparability of accounting information affects corporate risk-taking. Based on this, from the perspective of corporate risk-taking behavior, we attempt to study how the comparability of accounting information affects corporate risk-taking.Using Chinese A-share firms listed in Shanghai Stock Exchange and Shenzhen Stock Exchange from 2006 to 2016, we find that the comparability of accounting information significantly decreases corporate risk-taking. Channel tests provide direct evidence that the comparability of accounting information decreases corporate risk-taking by reducing accrual earnings management, and enhancing real earnings management and pay-performance sensitivity of executives. Moreover, cross-sectional tests show that the result is more pronounced for firms with worse information environment. We further find that the comparability of accounting information has a negative effect on corporate value by lowering risk-taking.Our study may have the following contributions: First, based on the comparability of accounting information, it discusses the relationship between accounting information comparability and corporate risk-taking, and enriches the relevant literature on the influencing factors of corporate risk-taking. Second, different from the focus of the existing research, it provides new insights on the relation between accounting information comparability and a vital dimension of corporate investment decision, that is, corporate risk-taking. Third, it shows that the improvement of comparability will enhance the awareness and choice of corporations to avoid risks, which will have a negative impact on risk-taking and damage corporate value. In the operation, corporations need to objectively use the comparability of accounting information for risk assessment, so as to avoid losing investment projects with positive net present value due to excessive risk aversion.