Deleveraging and Decline in Revenue‐Expense Matching Over Time

20 Pages Posted: 8 Nov 2018

See all articles by Jeong‐Hoon Hyun

Jeong‐Hoon Hyun

Neoma Business School

Hyungjin Cho

Inha University - College of Business Administration

Date Written: October/November 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: earnings quality, financing decision, leverage, revenue‐expense matching

Suggested Citation

Hyun, Jeong‐Hoon and Cho, Hyungjin, Deleveraging and Decline in Revenue‐Expense Matching Over Time (October/November 2018). Journal of Business Finance & Accounting, Vol. 45, Issue 9-10, pp. 1031-1050, 2018, Available at SSRN: https://ssrn.com/abstract=3280471 or http://dx.doi.org/10.1111/jbfa.12343

Jeong‐Hoon Hyun (Contact Author)

Neoma Business School

1 Rue du Maréchal Juin
Mont Saint Aignan Cedex, 76825
France

Hyungjin Cho

Inha University - College of Business Administration ( email )

Incheon
Korea, Republic of (South Korea)

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