TITLE:
Timing of Revenues and Expenses: Evidence from Finland
AUTHORS:
Erkki K. Laitinen, Teija Laitinen
KEYWORDS:
Timing of Expenses, Time Lag Parameters, Time-Series Data, Distributed Lag Model, Profitability, Growth, Finnish Firms
JOURNAL NAME:
Theoretical Economics Letters,
Vol.12 No.3,
June
15,
2022
ABSTRACT: In accounting, a critical issue is the timing of
revenues and expenses in the annual closing of accounts. If expenditures are
expired as expenses faster than revenues are generated, the expense method is
accelerated. In the opposite case, the expense method is decelerated. Thus, the
timing (time lags) of expenses and revenues is an important determinant of
earnings and profitability. The objective of this study is to analyze
critically alternative methods to estimate the time lags of revenues and
expenses. Six different methods based on correlation, return on investment,
logarithmic differences, unrestricted OLS, restricted OLS, and Solver optimization
are analyzed. Empirically, these methods are applied to nine-year time series
of financial statements from a sample of 697 Finnish firms. Empirical analyses
show that these methods still have deficiencies that potentially lead to
unreliable results of timing. In future, more research on this important topic
is called for.