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Matching and the Changing Properties of Accounting Earnings over the Last 40 years
Ilia Dichev, University of Michigan
Vicki Wei Tang, Georgetown University
ABSTRACT. This paper presents a theory and empirical evidence that investigate the effects of poor matching on the properties of accounting earnings. The key intuition of the theory is that poor matching manifests as noise in the economic relation of advancing expenses to earn revenues. As a result, poor matching decreases the correlation between contemporaneous revenues and expenses and increases the non-contemporaneous correlation. Poor matching also increases earnings volatility, decreases earnings persistence, and induces a negative autocorrelation in earnings changes. The empirical tests document effects consistent with those predictions over the last 40 years. We conclude that accounting matching has become worse over time, which has produced a pronounced effect on the properties of earnings. This evidence also suggests that the FASB’s stated goal of moving away from matching and towards more fair-value accounting is likely to deepen the identified trends.
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