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Cross-sectional variation in revenue-expense relation and cost of equity

Sangwan Kim

Managerial Finance, 2018, vol. 44, issue 11, 1311-1329

Abstract: Purpose - The purpose of this paper is to investigate whether revenue-expense matching is inversely associated with cost of capital and information asymmetry, respectively, in the equity markets. Design/methodology/approach - This paper uses a firm-specific measure of revenue-expense matching consistent with Dichev and Tang (2008). To obtain a proxy for cost of equity, this paper uses the average Findings - This paper documents that firms with high revenue-expense matching enjoy a lower cost of capital, supporting the direct impact of high matching on cost of capital by increasing the precision of public information signals. Further, matching of contemporaneous revenues and expenses is inversely associated with information asymmetry, suggesting that the indirect impact of high matching on cost of capital through its impact on information asymmetry is also plausible. Originality/value - Although an extensive body of literature has established a link between various disclosure/earnings properties and cost of capital, this research is the first to establish a link between matching and cost of capital. This paper fills the void in the literature by showing that revenue-expense matching – a fundamental property of accounting earnings – affects equity investors’ required rate of returns.

Keywords: Cost of equity; Accounting earnings; Matching; Information environments (search for similar items in EconPapers)
Date: 2018
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