Managerial Discretion, Matching, and the Market

• In Event: Accounting Attributes

Abstract

We investigate two similar, but distinct goals in financial reporting, that expenses match the revenues they generate, and that revenues and expenses produce earnings that are value relevant. To investigate how well these benchmarks are achieved in practice, we study a managerial choice subject to discretion, and important to earnings: depreciation. Estimating firm-specific real and counterfactual depreciation policies using the time series of capital expenditures and reported depreciation expenses, we find two core results. First, there is a matching-market gap, which means that these two important benchmarks cannot be simultaneously achieved by a single earnings measure or accounting standard. Second, we find that current reporting practice is more aggressive than what either reporting benchmark would dictate, consistent with managerial discretion.

Authors

• Andrew Bird, Carnegie Mellon University

• Thomas Ruchti, Carnegie Mellon University