Does Financial Statement Comparability Trigger or Deter Earnings Management Contagion?
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As a cross-firm attribute, a firm’s accounting comparability is expected to affect the firm’s interaction with peer firms. Given prior evidence of widespread earnings management contagion, this study examines how financial statement comparability affects earnings management contagion. After controlling for industry and firm characteristics, I find that greater comparability leads to a reduction in earnings management contagion, indicating that more comparable accounting information weakens managers’ incentives to engage in earnings management following peers’ earnings management behavior. Furthermore, the role of comparability in deterring contagion is more pronounced in firms facing a more asymmetric information environment. The negative impact of comparability on contagion in earnings management can be interpreted with the notion of social norms developed in sociology literature: facing peer firms’ misreporting behavior, high accounting comparability promotes firms to follow injunctive norms rather than descriptive norms. Overall, my findings suggest that accounting comparability plays a role as a governance mechanism by preventing the spread of managers’ misbehavior across firms.