Deleveraging and Decline in Revenue-Expense Matching over Time

Journal of Business, Finance & Accounting, Forthcoming

39 Pages Posted: 7 Dec 2016 Last revised: 19 Jul 2018

See all articles by Jeong-Hoon Hyun

Jeong-Hoon Hyun

Neoma Business School

Hyungjin Cho

Inha University - College of Business Administration

Date Written: July 6, 2018

Abstract

Accounting rules mandate that the cost of debt should be recorded as an expense, while the cost of equity does not appear in the income statement. Therefore, the amount of financing expense, and thus net income, in the income statements depends on how firms finance their business. Based on a clear, substantial trend of declining leverage since the 1990s, we examine how changes in capital structure might influence earnings attributes–the matching between revenues and expenses. We find that the contemporaneous relation between revenues and interest expense in US firms has decreased from 1972 to 2013, a result of both changes in leverage and the declining explanatory power of interest expense with respect to revenues. When we construct the weighted average costs of capital based on the costs of both debt and equity, we find the contemporaneous relation between revenues and the costs of capital has not significantly changed. Our results indicate that differential accounting treatment of the costs of debt and equity can affect earnings attributes through change in capital structure.

Keywords: revenue-expense matching, earnings quality, financing decision, leverage

JEL Classification: M41, G32

Suggested Citation

Hyun, Jeong-Hoon and Cho, Hyungjin, Deleveraging and Decline in Revenue-Expense Matching over Time (July 6, 2018). Journal of Business, Finance & Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2880405 or http://dx.doi.org/10.2139/ssrn.2880405

Jeong-Hoon Hyun

Neoma Business School ( email )

59, rue Pierre Taittinger
Reims, 51100
France

Hyungjin Cho (Contact Author)

Inha University - College of Business Administration ( email )

Incheon
Korea, Republic of (South Korea)

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