How does managerial entrenchment relate to Financial statement comparability?

Abstract

In this study, we document that managerial entrenchment is significantly and negatively associated with financial statement comparability, providing new insights into managerial effects on financial reporting quality. Moreover, by using business segments as a proxy for business complexity, we confirm that the variation of accounting comparability with peer firms mainly stems from managers' investment choices, supporting FASB's assertion that financial statement comparability is a reporting quality that should be enhanced among firms with similar economic foundations. Finally, we test whether managerial entrenchment affects how financial statement comparability impacts merger and acquisition decisions. We provide evidence consistent with entrenched managers paying less attention to target firms' financial statement comparability in the due diligence process, and that post-merger returns from these acquisition deals are lower when target firms have higher levels of managerial entrenchment. Our results hold with alternative measures of entrenchment and financial statement comparability.