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Motives for Early Revenue Recognition: Evidence from SEC Staff Accounting Bulletin (SAB) 101Jennifer Lynne M. AltamuroOhio State University (OSU) - Fisher College of Business Anne BeattyOhio State University (OSU) - Department of Accounting & Management Information Systems Joseph WeberMassachusetts Institute of Technology (MIT) - Sloan School of Management August 1, 2002 Abstract: The adoption of SAB 101, a regulation affecting revenue recognition, was controversial. The SEC argued that firms were using their revenue recognition practices to manage earnings, while opponents asserted that eliminating accepted revenue recognition practices would decrease the quality of reported earnings. This paper investigates these two competing hypotheses. We find evidence that some firms affected by SAB 101 had been using the targeted revenue recognition practices to manage earnings to meet important benchmarks and reduce their contracting costs, and that the correlation between earnings and cash flows was lower for these firms. However, we also find a decline in the correlation between earnings and cash flows after the implementation of SAB 101 for all firms affected by this regulation. These results raise questions about the effectiveness of this regulation.
Number of Pages in PDF File: 36 Keywords: revenue recognition, earnings management, earnings benchmarks, financial reporting JEL Classification: M41, M43, M44, M49 working papers seriesDate posted: January 12, 2003Suggested CitationContact Information
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