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Managerial Discretion, Matching, and the Market

49 Pages Posted: 17 Dec 2015 Last revised: 1 Jul 2017

Andrew Bird

Carnegie Mellon University - Tepper School of Business

Thomas G. Ruchti

Carnegie Mellon University - Tepper School of Business

Date Written: June 10, 2017

Abstract

We investigate two similar, but distinct benchmarks in financial reporting, that expenses match the revenues they generate, and that revenues and expenses produce earnings that are value relevant. To investigate how well these may be achieved in practice, we study a managerial choice subject to discretion, and important to earnings: depreciation. Estimating firm-specific real and counterfactual depreciation policies using the time series of capital expenditures and reported depreciation expenses, we find two core results. First, there is a matching-market gap, which means that these two important benchmarks cannot be simultaneously achieved by a single earnings measure or accounting standard. Second, we find that current reporting practice is more aggressive than what either reporting benchmark would dictate, consistent with managerial discretion.

Keywords: managerial discretion, matching, value relevance, financial reporting

JEL Classification: G31, M41, M48

Suggested Citation

Bird, Andrew and Ruchti, Thomas G., Managerial Discretion, Matching, and the Market (June 10, 2017). Available at SSRN: https://ssrn.com/abstract=2704105 or http://dx.doi.org/10.2139/ssrn.2704105

Andrew Bird

Carnegie Mellon University - Tepper School of Business ( email )

Pittsburgh, PA 15213-3890
United States

Thomas G. Ruchti (Contact Author)

Carnegie Mellon University - Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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