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Abstract
I examine whether the implementation of Topic 606 meets the FASB’s objective of improving income statement comparability. Using difference-in-differences analyses, I explore whether post-implementation changes in income statement comparability vary across industries. Contrary to the FASB’s intent, I find a general decrease in income statement comparability across all industries following the implementation of Topic 606. However, additional analyses indicate that when the new standard tightens revenue recognition guidance, income statement comparability increases, consistent with the FASB’s stated purpose. On the other hand, when the new standard relaxes guidance, comparability decreases. I also investigate whether these changes in comparability influence (1) the correlation in analysts’ forecast errors among firms within industries and (2) differences in accruals earnings management strategies. I find that firms with relaxed guidance and a corresponding decrease in comparability (1) are associated with a lower correlation among analysts’ forecast errors in the same industry and (2) exhibit a lower correlation of abnormal accruals among industry peers. Overall, my nuanced results reveal that the effects of Topic 606 on income statement comparability, analysts’ forecasting ability, and managers’ financial reporting decisions depend on whether the new standard relaxes or tightens revenue guidance.