Changes Over Time in the Revenue-Expense Relation: Accounting or Economics?

50 Pages Posted: 13 Aug 2009 Last revised: 12 Apr 2011

See all articles by Dain C. Donelson

Dain C. Donelson

University of Iowa

Ross Jennings

University of Texas at Austin - Department of Accounting

John M. McInnis

University of Texas at Austin - Department of Accounting

Date Written: November 1, 2010

Abstract

Dichev and Tang (2008) document a dramatic decrease over the last 40 years in the contemporaneous correlation between revenue and expense, along with an associated increase in earnings volatility and a decline in earnings persistence, suggesting a decline in earnings quality. We document that these changes are primarily attributable to an increase in the incidence of large special items. We then examine the extent to which this increase in special items is due to either more frequent real economic events related to special item recognition or to the adoption of new accounting standards. Our evidence suggests that changes in the frequency of economic events associated with special items have played a more important and sustained role relative to the role played by adoption of individual accounting standards. Finally, we find that the changing incidence of these economic events is at least in part related to the well-documented increase in competition in the U.S. economy over the last four decades.

Keywords: earnings persistence, earnings volatility, matching, special items

JEL Classification: M41

Suggested Citation

Donelson, Dain C. and Jennings, Ross and McInnis, John M., Changes Over Time in the Revenue-Expense Relation: Accounting or Economics? (November 1, 2010). Accounting Review, Vol. 86, pp. 945-974, May 2011, McCombs Research Paper Series No. ACC-08-09, Available at SSRN: https://ssrn.com/abstract=1446924

Dain C. Donelson

University of Iowa ( email )

108 Pappajohn Business Building
Iowa City, 52242-1000
United States

Ross Jennings

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-5340 (Phone)
512-471-3904 (Fax)

John M. McInnis (Contact Author)

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-232-6791 (Phone)

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