Does Financial Statement Line-Item Comparability Affect Analysts’ Forecasts?

Abstract

This study investigates comparability of firms’ financial statement presentation, that is, the display of line items on financial statements. The line items that are displayed on financial statements are the result of disclosure choices such as placement, formatting, and aggregation. Given the emergence of machine-readable data (for example, XBRL-tags used in this paper in creating our test variable), a question arises about the relevance of items’ presentation on the face of the human-readable financial statements. This paper examines the relation between line-item comparability (based on the face of financial statements) and financial statement users’ judgments as proxied by attributes of analysts’ forecasts. We posit that greater line-item comparability likely lowers analysts’ processing costs and enhances analysts’ ability to evaluate firms’ economic performance. Our results indicate that greater line-item comparability is associated with more analyst coverage, increased forecast accuracy, reduced forecast dispersion, and greater timeliness of forecasts. Overall, these results suggest that comparability of line items on the face of financial statement enhances informativeness.