Financial statement comparability and analysts' optimism for accruals

This study examines the role of financial statement comparability in mitigating analysts' optimism for accruals. Prior research shows that sell-side analysts do not fully incorporate accrual information in anticipating future earnings and thus tend to issue more optimistic forecasts for firms with a higher level of accruals. We posit that financial statement comparability allows analysts to use industry peers' information in assessing the persistence of accruals, thereby lowering their optimism for accruals. We find that analysts' accrual-related optimism is significantly moderated for firms with a high degree of financial statement comparability. Further, we disaggregate financial statement comparability into accrual comparability and cash flow comparability and find that the inverse relation between comparability and analysts' optimism for accruals is driven by accrual comparability rather than cash flow comparability. Moreover, exploiting the mandatory adoption of IFRS as an exogenous increase in comparability, we find that analysts' optimism for accruals decreases significantly following the IFRS adoption while it does not show a significant change in non-IFRS-adopting countries during the same period. Collectively, the results suggest that financial statement comparability helps analysts process and interpret accrual information, thereby improving their forecasting activities.