The Effect of Matching on Firm Earnings Components

Joong-Seok Cho, Hyung Ju Park

Abstract


Using a sample of all U.S. firms listed on the U.S. major stock exchanges for the period covering 1988 through 2014, we investigate the relation between firm earnings components and matching. Following the methodology of Hui et al. (2016), we decompose earnings into industry-wide and firm-specific earnings. Then, we partition them into cash flows and accruals, four earnings components. As our matching measure, we use the correlation between revenues and expenses over the five-year rolling period. We investigate how matching affects the persistence of each earnings component and our results indicate that matching enhances the persistence of earnings components. Furthermore, our study shows that the effect is more outstanding on firm-specific accruals, which are more prone to the management discretion, than cash flows.

Keywords


Firm-specific earnings, industry-wide earnings, matching, persistence, capital markets

JEL Codes


G14, M41

Full Text:

PDF

References


Ayers, B., and Freeman, R. N., 1997. Market assessment of industry and firm earnings information. Journal of Accounting and Economics, 24(2), 205-218. doi: http://dx.doi.org/10.1016/S0165-4101(98)00002-0

Barth, M. E., Beaver, W. H., Hand, J. R., and Landsman, W. R., 1999. Accruals, cash flows, and equity values. Review of Accounting Studies, 4(3/4), 205-229. doi: http://dx.doi.org/10.1023/A:1009630100586

Barth, M. E., Landsman, W. R., and Lang, M. H., 2008. International accounting standards and accounting quality. Journal of Accounting Research, 46(3), 467-498. doi: http://dx.doi.org/10.1111/j.1475-679X.2008.00287.x

Dechow, P., 1994. Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of Accounting and Economics, 18(1), 3-42. doi: http://dx.doi.org/10.1016/0165-4101(94)90016-7

Dechow, P., Kothari, S., and Watts, R., 1998. The relation between earnings and cash flows. Journal of Accounting and Economics, 25(2), 133-168. doi: http://dx.doi.org/10.1016/S0165-4101(98)00020-2

Dichev, I., Graham, J., Harvey, C., and Rajgopal, S., 2013. Earnings quality: Evidence from the field. Journal of Accounting and Economics, 56(2-3), 1-33. doi: http://dx.doi.org/10.1016/j.jacceco.2013.05.004

Dichev, I., and Tang, V., 2008. Matching and the changing properties of accounting earnings over the last 40 years. The Accounting Review, 83(6), 1425-1460. doi: http://dx.doi.org/10.2308/accr.2008.83.6.1425

Dichev, I., and Tang, V., 2009. Earnings volatility and earnings predictability. Journal of Accounting and Economics, 47(1-2), 160-181. doi: http://dx.doi.org/10.1016/j.jacceco.2008.09.005

Gow, I., Ormazabal, G., and Taylor, D., 2010. Correcting for cross-sectional and time-series dependence in accounting research. The Accounting Review, 85(2), 483-512. doi: http://dx.doi.org/10.2308/accr.2010.85.2.483

Hui, K. W., Nelson, K. K., and Yeung, P. E., 2016. On the persistence and pricing of industry-wide and firm-specific earnings, cash flows, and accruals. Journal of Accounting and Economics, 61(1), 185-202. doi: http://dx.doi.org/10.1016/j.jacceco.2015.06.003

Lang, M., Raedy, J., and Yetman, M., 2003. How Representative Are Firms That Are Cross-Listed in the United States? An Analysis of Accounting Quality. Journal of Accounting Research, 41(2), 363-386. doi: http://dx.doi.org/10.1111/1475-679X.00108

Leuz, C., Nanda, D., and Wysocki, P., 2003. Earnings Management and Investor Protection: An International Comparison. Journal of Financial Economics, 69(3), 505-527. doi: http://dx.doi.org/10.1016/S0304-405X(03)00121-1

Sloan, R. G., 1996. Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings? The Accounting Review, 71, 289-315.

Su, S. Y., 2005. To match or not to match. The British Accounting Review, 37(1), 1-21. doi: http://dx.doi.org/10.1016/j.bar.2004.08.001

Watts, R. L., 1977. Corporate financial statements, a product of the market and political processes. Australian Journal of Management, 2(1), 53-75. doi: http://dx.doi.org/10.1177/031289627700200104

Xie, H., 2001. The mispricing of abnormal accruals. The Accounting Review, 76(3), 357-373. doi: http://dx.doi.org/10.2308/accr.2001.76.3.357




DOI: http://dx.doi.org/10.1515/saeb-2017-0033

Refbacks

  • There are currently no refbacks.