Income Statement Mismatching Conveys Information and Has Not Reduced the Informativeness of Earnings Over Time

Abstract

Research has concluded that there has been a decline in the informativeness of earnings over recent years. The reported decline has been attributed to an increasing mismatch of expenses to revenues from the increasing expensing of investment to the income statement. This paper challenges this attribution: The mismatching adds information for pricing. It does so by distinguishing higher risk investment from that booked to the balance sheet, and the market prices it as such. Further, in a seeming contradiction, the mismatching enhances matching, and empirical tests confirm. Once mismatched expenses and matched earnings are separated, there is little indication of a decline in the information content of accounting over time.

Keywords: Earnings Matching, Investment Risk, Information in Earnings

JEL Classification: G11, G12, M41