The Effect of Changes in Financial Leverage and Debt Cost on Revenue-Expense Matching

Accounting rules mandate that the cost of debt should be recorded as an expense, while the cost of equity does not appear in the income statement. Therefore, the amount of financing expense, and thus net income, in the income statements depends on how firms finance their business. In this study, the effect of changes in financial leverage and interest expense have been studied on revenue-expense matching in the companies listed on the Tehran Stock Exchange. The sample includes 199 companies listed in the Tehran Stock Exchange from 1383 to 1397. The results show that revenue-expense matching is higher for companies with a large reduction in financial leverage. In addition, incremental changes in the financial leverage have a negative effect on the simultaneous relation between revenues and non-operating expenses matching.  Also, the results show that only reduction changes in interest expense led to an improvement in simultaneous revenues and non-operating expenses matching. In general, results indicate that differential accounting treatment of the costs of debt and equity can affect earnings attributes through a change in capital structure