53 Pages Posted: 17 Dec 2015
Date Written: December 15, 2015
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: Suggested Citation