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

50 Pages Posted: 18 Feb 2021 Last revised: 28 Oct 2021

See all articles by Hyung Il Oh

Hyung Il Oh

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Stephen H. Penman

Columbia University - Columbia Business School, Accounting, Business Law & Taxation

Date Written: October 10, 2021

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

Suggested Citation

Oh, Hyung Il and Penman, Stephen H., Income Statement Mismatching Conveys Information and Has Not Reduced the Informativeness of Earnings Over Time (October 10, 2021). Columbia Business School Research Paper, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3778173 or http://dx.doi.org/10.2139/ssrn.3778173

Hyung Il Oh

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 02455
Korea, Republic of (South Korea)

Stephen H. Penman (Contact Author)

Columbia University - Columbia Business School, Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States
212-854-9151 (Phone)
212-316-9219 (Fax)

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