Investigating the Effect of Financial Statement Comparability on the Marginal Value of Cash Holdings and Marginal Value of Capital Expenditure: Instrumental Variables Approach

Financial statement comparability reduces the information asymmetry between managers and investors not only by making it easier for investors to identify timelier signals about the profitability of projects undertaken by managers, but also by enabling investors to extract from comparable peers information useful for monitoring firms’ use of corporate resources, thereby making them less reliant on the disclosures made by the firms. This research examines the impact of financial statement comparability on the marginal value of cash holdings and capital expenditure. In order to measure the financial statement comparability, this study uses the method of De Franco et al. The sample consists of 122 companies listed on Tehran Stock Exchange for the period 2013 to 2020. Since, the financial statement comparability is an endogenous variable, this study uses an instrumental variables approach and a Two-Stage Least Squares estimator to test the research hypotheses. Findings indicate that the increase in financial statement comparability increases the marginal value of cash holdings and the marginal value of capital expenditure.