Financial reporting comparability in US firms issuing debt in the US Primary Market

We propose a method of measuring the comparability of reported accounting numbers from the perspective of creditors. Our measure reflects the relationship between market variables related to default probabilities and key accounting numbers of interest to lenders. We demonstrate that this measure has a negative and significant relationship with the spread of credit rating assessments of new bond issues, thus reflecting information quality. We also show that new bond issues of firms with superior comparability have better credit ratings and reduced bond yields, ceteris paribus. Our findings are commensurate with comparability reducing the information uncertainty surrounding credit risk assessments derived from a firm’s financial information. Comparison of the impact of comparability on public and private bond issues suggests that the impact of comparability is greater in the public market, which we suggest is due to the presence of uninformed investors and higher reputation costs for the rating agencies.