Cost Structure and the Usefulness of Earnings

59 Pages Posted: 19 Jun 2018 Last revised: 14 Sep 2021

See all articles by Brian D. Cadman

Brian D. Cadman

University of Utah - David Eccles School of Business

Elia Ferracuti

Duke University - Fuqua School of Business

Date Written: September 2, 2021

Abstract

We investigate the relation between the usefulness of earnings and a firm’s cost structure. We document that firms with a greater proportion of fixed to variable costs, a higher degree of operating leverage, report more volatile earnings and are more likely to aggressively recognize revenue to meet earnings thresholds. We then show that the usefulness of earnings to external users decreases in the degree of operating leverage and that this decrease stems from the effect of cost structure on earnings volatility and aggressive revenue recognition. Our results illuminate how firm fundamentals influence a firm’s information environment and the usefulness of earnings to external users.

Keywords: Cost Structure, Degree of Operating Leverage, Earnings Properties, Earnings Usefulness, Reporting Incentives

JEL Classification: D24, G31, M41

Suggested Citation

Cadman, Brian D. and Ferracuti, Elia, Cost Structure and the Usefulness of Earnings (September 2, 2021). Available at SSRN: https://ssrn.com/abstract=3190649 or http://dx.doi.org/10.2139/ssrn.3190649

Brian D. Cadman (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 Campus Center Drive
Salt Lake City, UT 84112
United States
801-585-9517 (Phone)

HOME PAGE: http://www.business.utah.edu/bio/briancadman

Elia Ferracuti

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-1974 (Phone)

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