Effect of Earnings Management on Principle of Matching Costs with Revenue
Asian Tax Journal Vol. 14 No. 3 (2013), pp. 9-28
Abstract
This paper analyzes the adequacy of earnings management and principle of matching costs with revenue(matching principle). Dichev and Tang(2008) find a clear and economically substantial trend of declining contemporaneous correlation between revenues and expenses, increased volatility of earnings, declining persistence of earnings, and increased negative autocorrelation in earnings changes with a sample of the 1,000 largest U.S. firms over the last 40 years. Wonsun Paek(2011a) examines trend of matching between revenues and expenses over time and across industries and identifies determinants of the matching. He finds that the matching of contemporaneous association between revenues and expenses gradually deteriorates over the sample period as consistent with Dichev and Tang(2008).Wonsun Paek(2011b) examines the relation between earnings quality and neutrality of accounting information characterized by matching principle between revenues and expenses. Empirical analysis finds that earnings are of higher quality for more-neutral-accounting firms than otherwise. Specifically, compared to less-neutral-accounting firms, more-neutral-accounting firms show higher earnings persistence and predictability, higher accrual quality, more income smoothness, and larger earnings response coefficients. Previous studies shows that in case that earnings management exists, the effectiveness of the informative on the components of accounting earnings is different and the reliability of accounting deteriorates. When opportunistic earnings managements occurs, we can expect that earnings quality deteriorates and that the low degree of the matching principle is mainly due to the earnings management. Empirical analysis is performed for the sample consisting of 3,623 non-financial firm-years with December fiscal year that are traded over Korea Exchange for 1991-2009 to analyze the relationship between earnings management and matching principle. We find that matching principle is of lesser degree for the firm with higher earnings management. Based on previous studies, the important factor contributing to deterioration of the matching principle is the principle based standard upon the introduction of IFRS, the various methods of revenue recognition, and the different costs structure. The findings in this study provide the additional contribution of whether earnings management is one of the reasons.
Keywords
- earnings management
- discretionary accruals
- matching principle
- the adequacy of matching principle
- earnings quality
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