Strategic Revenue Recognition to Achieve Earnings Benchmarks

Abstract:     
I examine whether managers use discretion in the two accounts related to revenue recognition, accounts receivable and deferred revenue, to avoid three common earnings benchmarks. I find that managers use discretion in both accounts to avoid negative earnings surprises. I find that neither of these accounts is used to avoid losses or earnings decreases. For a common sample of firms with both deferred revenue and accounts receivable, I show that managers prefer to exercise discretion in deferred revenue vis-à-vis accounts receivable. I provide a reason for why managers might prefer to manage a deferral rather than an accrual: lower costs to manage (i.e., no future cash consequences). My results suggest that if given the choice, managers prefer to use accounts that incur the lowest costs to the firm.

Number of Pages in PDF File: 30

Keywords: Revenue recognition, earnings surprises, earnings management, accounts receivable, deferred revenue

JEL Classification: M40, M41, M43, M49, G14, G38, G29

working papers series