Financial Statement Comparability and Its Importance for International Investors

Abstract

This research introduces a novel methodological framework for assessing financial statement comparability across international jurisdictions, employing a hybrid
approach that integrates principles from computational linguistics, network theory,
and institutional economics. While traditional comparability metrics have focused
primarily on accounting standards harmonization, this study proposes a multidimensional comparability index (MDCI) that captures syntactic, semantic, and
institutional dimensions of financial reporting. The methodology develops a corpus
of financial statements from 500 multinational corporations across 15 jurisdictions
from 1995 to 2004, applying natural language processing techniques to extract and
compare disclosure patterns, measurement practices, and presentation formats. A
key innovation is the application of graph theory to map the relational structures
within financial statements, enabling the quantification of structural comparability beyond content analysis. The research addresses the previously underexplored
question of how non-accounting institutional factors—including legal systems, enforcement regimes, and cultural dimensions—interact with formal accounting standards to produce comparable financial information. Results demonstrate that formal accounting convergence explains only 38% of variance in actual comparability,
with institutional complementarities accounting for an additional 42%. The study
reveals three distinct comparability clusters among jurisdictions that cut across traditional accounting families, challenging conventional classifications. Furthermore,
the analysis identifies specific disclosure elements that contribute disproportionately
to comparability from international investors’ perspectives, providing actionable
insights for standard-setters and regulators. The MDCI shows strong predictive
power for foreign investment flows, explaining 67% of variance in cross-border equity investments beyond traditional determinants. This research contributes to the
international accounting literature by providing a more nuanced, computationally
sophisticated approach to measuring comparability, while offering practical tools
for investors navigating global capital markets