Does Securities-Related Class Action Lawsuit Enhance Firms’ Revenue-Expense Matching? Evidence from Korea

This study investigates whether the introduction of Korea’s securities-related class action (SCA) regime enhances firms’ adherence to the revenue-expense matching principle, a core dimension of earnings quality. Using 9,377 firm-year observations for non-financial Korean listed firms from 2002 to 2010, we estimate a matching model in which revenues are regressed on contemporaneous, lagged, and lead expenses, and an indicator for exposure to the staggered implementation of the SCA, including their interactions, along with standard firm-level controls and industry- and year-fixed effects. Our main coefficient of interest, the interaction between current expenses and the SCA indicator, is positive and significant, supporting the hypothesis. These results indicate that, following the introduction of the SCA, firms shift expense recognition toward the current period in which revenues are generated, thereby improving contemporaneous matching and reducing inter-period mismatching. Moreover, we find that the main finding is more pronounced in the high likelihood of litigation risk measured by accrual estimation errors. The findings are robust to alternative fixed-effects structures that include firm fixed effects and industry-by-year fixed effects. Additional analyses show that the positive effect of the SCA on matching is concentrated in firms audited with higher audit efforts, and in firms whose CEOs hold large ownership stakes. Overall, the evidence suggests that legal reforms that raise litigation risk for misreporting can improve the quality of core accrual processes. This study extends both the securities class action and revenue-expense matching literatures by demonstrating that non-accounting legal institutions can strengthen adherence to fundamental accounting principles.