Matching and the Changing Properties of Accounting Earnings Over the Last 40 Years

Posted: 28 May 2008

See all articles by Ilia D. Dichev

Ilia D. Dichev

Emory University - Department of Accounting

Vicki Wei Tang

Georgetown University - Robert Emmett McDonough School of Business

Abstract

We present a theory that poor matching manifests as noise in the economic relation of advancing expenses to earn revenues. As a result, poor matching decreases the correlation between contemporaneous revenues and expenses, increases earnings volatility, decreases earnings persistence, and induces a negative autocorrelation in earnings changes. The empirical tests document these effects in a sample of the 1,000 largest U.S. firms over the last 40 years. We find a clear and economically substantial trend of declining contemporaneous correlation between revenues and expenses, increased volatility of earnings, declining persistence of earnings, and increased negative autocorrelation in earnings changes. The combined evidence suggests that accounting matching has become worse over time and that this trend has a pronounced effect on the properties of the resulting earnings. This evidence also suggests that the standard setters' stated goal of moving away from matching and towards more fair-value accounting is likely to continue and deepen the identified trends in the properties of earnings.

Keywords: matching principle, fair-value accounting, earnings properties

JEL Classification: M41, M44, C21

Suggested Citation

Dichev, Ilia D. and Tang, Vicki Wei, Matching and the Changing Properties of Accounting Earnings Over the Last 40 Years. Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1134984

Ilia D. Dichev (Contact Author)

Emory University - Department of Accounting ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Vicki Wei Tang

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

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