International Evidence on the Matching Between Revenues and Expenses

Abstract

This study investigates the time-series trend and determinants of matching between revenues and expenses in a sample of 42 countries. We find that the decline in matching documented by Dichev and Tang (2008) is not unique to the United States, but is a worldwide phenomenon. Our results show that matching is weaker in countries with (i) wider use of accrual accounting; (ii) a larger proportion of firms reporting significant special items; (iii) slower economic growth; (iv) more research and development activities; (v) larger service sectors; and (vi) stronger investor protection. We find no evidence that mandatory adoption of International Financial Reporting Standards affects matching. Changes in accounting and economic factors collectively explain the downward trend in matching. Overall, the results suggest that both accounting and economic factors are important determinants of matching over time and across countries.

A Renewed Interest on the Fundamentals of Accounting: The Impact of the Matching ‘Principle’ on Earning Attributes

“…A totally different position from Dichev and Tang [3] is also assumed by He and Shan [38], who analyse the impact of IFRS adoption on matching and do not find any significant result, excluding that changes in reporting system have a primary role in determining changes in the degree of matching between current revenues and expenses. In addition, they analyse several economic factors as potential determinants of matching, such as the proportion of firms reporting large special items, the national economic growth, the weight of the service industry Accounting from a Cross-Cultural Perspective in a country's gross domestic product (GDP), and the intensity of R&D activities.…”

“…Along the lines of these studies, He and Shan [38] measure matching by the contemporaneous correlation between revenues and expenses. Relying on a sample that includes 42 countries, they estimate the annual matching coefficient from 1991 to 2010, and find that the decline in Figure 3.…”

“…Overall, looking at these studies focused on the identification of trends in the degree of matching, it seems clear that the major issue is related to a worsening of the relation between [38].…”

Deleveraging and decline in revenue‐expense matching over time

“…It suggests that the correlation between revenues and expenses has decreased over time in US firms (Dichev & Tang, 2008;Donelson et al, 2011;Srivastava, 2014) and international firms (He & Shan, 2016). Specifically, Donelson et al (2011) provide evidence that this decline is largely attributable to special items, and is motivated by frequent economic events, particularly increasing product market competition, rather than the adoption of specific accounting standards.…”

“…Prior research provides interesting observations on the relation between revenue and expense components over time. It suggests that the correlation between revenues and expenses has decreased over time in US firms (Dichev & Tang, ; Donelson et al., ; Srivastava, ) and international firms (He & Shan, ). Specifically, Donelson et al.…”