Do Analysts Benefit from Revenue-Expense Matching?

• In Event: Strategic Disclosures 1

Abstract

Analysts are known to form their earnings expectations based on various information signals including accounting earnings. The idea of matching expenses with contemporaneous revenues has been one of the most important accounting concepts in measuring a firm’s earnings. This paper investigates whether analysts’ forecasts benefit from accounting earnings of high revenue-expense matching. Using sell-side analysts’ earnings forecasts, this paper documents higher (lower) forecast accuracy (dispersion) for firms with high revenue-expense matching after controlling for persistence and volatility of earnings. Further, the association between revenue-expense matching and analysts’ forecasts is more pronounced when analysts issue earnings forecasts of firms with high corporate economic activity and when analysts predict future earnings (relative to future cash flows). Finally, a demand factor dominates a supply factor when analysts make coverage decisions for firms with different levels of revenue-expense matching. Overall, these results demonstrate important economic benefits associated with matching of contemporaneous revenues and expenses.

Author

• Sangwan Kim, University of Massachusetts-Boston