Title: The comparability effects of principles based standards

Authors: David Cabán

Addresses: Department of Business, Rollins College, 1000 Holt Avenue, Winter Park, FL32789, USA

Abstract: This paper delves into the impact of transitioning from rules-based to principles-based accounting standards and its effect on financial statement comparability. The study leverages the ASC 606 adoption as a unique event to assess how this shift influenced the comparability of financial statements across industries and its effect on analyst coverage. Drawing upon the foundational work of De Franco et al. (2011) to develop a financial comparability measure, the paper evaluates the research question employing multi-variate regression models to explore potential changes in comparability across firms between the Pre-ASC 606 and the ASC 606 period. The findings indicate an improvement in financial statement comparability at the market level, with a more pronounced effect within industries characterised by high recurring revenues. Furthermore, the study reveals a positive correlation between improved financial statement comparability and increased analyst coverage, implying that enhanced transparency under principles-based accounting standards makes firms more attractive to analysts.

Keywords: principles-based accounting; rules-based accounting; financial statement comparability; analyst coverage; ASC606.

DOI: 10.1504/AJFA.2025.146006

American Journal of Finance and Accounting, 2025 Vol.8 No.3, pp.195 - 216

Received: 17 Apr 2024
Accepted: 13 Nov 2024
Published online: 01 May 2025 *