Financial statement comparability and expected default risk

This study investigates the effects of financial statement comparability on corporate expected default risk (EDF). Based on three different comparability measures, we find that financial statement comparability is negatively related to the EDF in the current and subsequent periods. This negative effect is most pronounced in the short term and in firms near default. Cross-sectional tests reveal that the marginal effect of comparability on default risk is more pronounced for companies with less visibility, with less monitoring and for industries with less firms, which is consistent with the finding that companies with worse information environments and less monitoring benefit more from comparable statements. We also provide evidence through path analysis that comparability could help reduce default risk through improved information efficiency and attracting long-term oriented investors. Additional analyses show that this pattern is more significant during recession periods, including the 1990s Doc-com Bubble, the 2008 Financial Crisis, and the 2020 Pandemic.