Peer Accounting Comparability and Focal Firms’ Earnings Management: A Perspective of Accounting Discretion

This study investigates how firms manage earnings through accounting discretion when industry peers produce more comparable accounting information. Utilizing data from Chinese A‐share listed firms, we find that peer accounting comparability inhibits focal firms’ accruals‐based earnings management. We identify two possible mechanisms underlying this phenomenon. First, peer accounting comparability helps to establish generally accepted accounting practices that induce focal firms to align. Second, peer accounting comparability contributes to mitigating outsiders’ information asymmetry, thus improving external monitoring. Cross‐sectional analysis indicates that the effect of peer accounting comparability holds across varying levels of focal firms’ internal and external governance mechanisms. Furthermore, we find that manipulating accruals when peer accounting comparability is high causes lower cumulative abnormal returns during the earnings announcement window and a higher cost of equity. Finally, we show that when focal firms cannot manage earnings through accounting discretion because of high peer accounting comparability, they turn to real earnings management.