Financial Statement Comparability and the Cost of Equity Capital

This study examines the effect of financial statement comparability on the cost of equity capital. Greater financial statement comparability lowers the cost of acquiring and analyzing information for investors and increases the quantity and quality of information (De Franco et al. 2011; Kang et al. 2013). Further, comparable information helps investors identify and understand economic similarities and differences across companies and thus make more efficient investing decisions (FASB 2010). Therefore, investors are more likely to demand relatively lower expected returns, resulting in lower cost of equity capital. Using a sample of firms listed on the Korean Stock Exchange over the period from 2007 to 2010, we find that greater financial statement comparability with industry peer firms reduces the cost of equity capital. In addition, we show that the effect of financial statement comparability on the cost of equity capital is more pronounced for firms in highly competitive industries where competition acts as an effective external governance mechanism. Our findings suggest that financial statement comparability plays an important role in reducing firms' financing costs for investors and contributes to efficient allocation of capital.