The Effect of Matching on Firm Earnings Components

• Main Authors: Cho Joong-Seok, Park Hyung Ju
• Format: Article
• Language: English
• Published: Editura Universităţii „Alexandru Ioan Cuza” din Iaşi / Alexandru Ioan Cuza University of Iasi Publishing house 2017-12-01
• Series: Scientific Annals of Economics and Business
• Subjects: firm-specific earnings; industry-wide earnings; matching; persistence; capital markets; G14; M41
• Online Access: http://www.degruyter.com/view/j/saeb.2017.64.issue-4/saeb-2017-0033/saeb-2017-0033.xml?format=INT

Using a sample of all U.S. firms listed on the U.S. major stock exchanges for the period covering 1988 through 2014, we investigate the relation between firm earnings components and matching. Following the methodology of Hui et al. (2016), we decompose earnings into industry-wide and firm-specific earnings. Then, we partition them into cash flows and accruals, four earnings components. As our matching measure, we use the correlation between revenues and expenses over the five-year rolling period. We investigate how matching affects the persistence of each earnings component and our results indicate that matching enhances the persistence of earnings components. Furthermore, our study shows that the effect is more outstanding on firm-specific accruals, which are more prone to the management discretion, than cash flows.