Research
"The Effect of Cost-Elasticity Choice on Loss Reversal"
Although the prevalence of losses has been increasing over the years, little is known regarding managerial decisions resulting in reversing losses back to profits. We find cost-elasticity choices implied by operating actions made in advance significantly increase the likelihood of loss reversal. The results are robust to different estimation procedures and a battery of sensitivity analyses. The results are stronger for losses reported during an exogenous shock, the 2008 financial crisis, suggesting a causal effect. The contributions are twofold. First, we shed light on a mechanism underlying loss reversal. Particularly, we promote our understanding of how cost-elasticity choices made in advance affect the likelihood of loss reversal. Moreover, we demonstrate the likelihood of exercising the abandonment option is negatively and significantly related to cost elasticity. Second, the findings enrich the cost-accounting literature by demonstrating a meaningful implication of cost-elasticity choice.
"Mechanisms Underlying the Degree of Revenues–Expenses Matching"
This study revisits the association between revenues and expenses documented by Dichev and Tang (2008) by exploring two economic mechanisms: the firm’s loss status and asymmetric cost behavior. First, using a large panel of 110,889 firm-year observations from 1967 to 2023, I find that loss firms exhibit weaker revenues–expenses matching than profit firms, a phenomenon attributable to structural firm characteristics such as higher financial, operating leverage and smaller size. Second, I document asymmetric matching: expenses respond less to revenue declines than to increases, reflecting managerial frictions in resource adjustments. These findings hold after controlling for R&D expenditures, special items, and listing cohorts, suggesting that these mechanisms are robust and express fundamental economic forces. The contributions are twofold. First, I extend the stream of studies on revenues–expenses matching by identifying two economic mechanisms underlying weak revenues–expenses matching, above and beyond financial reporting issues or sample composition explanations documented in prior studies. Moreover, both losses and asymmetric cost behavior offer a broader understanding of the economics driving the matching decline over time. Second, I extend the cost-accounting literature by showing that asymmetric cost behavior not only affects cost levels but also impairs the matching degree during revenue declines.