This paper examines whether the degree of matching for poor-performing
fraud firms varies depending on the strength of the causal relation
between expenses and revenues. A stronger causal relation exists between
revenues and operating expenses than between revenues and total
expenses that include non-operating expenses as well as operating
expenses. Fraud firms have stronger incentives for managing earnings.
Given that managing earnings is easier when using non-operating items
than when using operating items, the degree of matching is (not) lower
for fraud firms than for non-fraud firms at the strong (weak) level of
the causal relation between revenues and expenses. Empirical results
suggest that the degrees of matching are different between fraud and
non-fraud firms only at the strong level of the causal relation between
revenues and expenses. This result implies that the investigation of the
matching model at a strong level of the causal relation between
revenues and expenses is more effective than that at a weak level of the
causal relation, with regard to examining the degree of matching for
fraud firms. This study contributes to the literature by providing
evidence on the importance of the level of the causal relation when
examining the degree of matching. [ABSTRACT FROM AUTHOR]