The effect of financial statement incomparability and notes labeling on investment decisions

Financial statement comparability is considered a vital component of financial reporting as it allows users to identify economic relationships by making like economics look alike and different economics look different. In contrast, incomparability obfuscates economic relationships by making 1) like economics look different or 2) different economics look alike. In this study, I use a laboratory experiment to investigate whether these two types of financial statement incomparability differentially affect the quality of investment decisions. I predict and find that while both types of incomparability are costly, incomparable reporting that makes different economics look alike results in lower quality investment judgments compared to incomparable reporting that makes like economics look different. Specifically, I find that incomparability on the face of the financial statements that makes like economics look different causes investors to incorporate notes information that would potentially clarify economic reality, while incomparability which makes different economics look alike causes investors to place less weight on notes information. I find that this weighting mediates the effect of incomparability type on investment decisions. Finally, I find that the differential effect of incomparability type on notes weighting and investment decisions is stronger when notes information is grouped under a header that explicitly links to information on the face of the financial statements compared to when it is grouped under a comprehensive umbrella-type header (e.g., significant accounting policies). Together, my results suggest that incomparability type and notes labeling collectively influence the quality of investment decisions.