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Determinants of Revenue Reporting Practices for Internet Firms

Posted: 14 Oct 2002  

Robert M. Bowen

University of San Diego - Department of Accountancy; University of Washington - Foster School of Business

Angela K. Davis

University of Oregon

Shivaram Rajgopal

Columbia Business School

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The financial press and accounting regulators (e.g., the SEC and FASB) have expressed concern about pressures on Internet firms to report high levels of revenue. This study verifies the association between market capitalization and revenue, and examines economic factors that potentially influence Internet company managers' decisions to adopt allegedly aggressive revenue recognition policies. Specifically, we examine factors hypothesized to influence reporting of advertising barter revenue and grossed-up sales levels.

We begin by providing descriptive evidence on the use of barter and grossed-up revenue across Internet sectors. While common in some sectors, we find that use of these accounting policies is not pervasive overall. We limit our empirical analyses to Internet companies that have the opportunity to report grossed-up or advertising barter revenue. Our cross-sectional predictions are based on both external and internal incentives to maximize revenues as well as constraints that may limit management's discretion. We predict that the following factors increase the likelihood that a firm will report grossed-up and/or barter revenue: shorter time before needing additional external financing, more active individual investor interest in the firm's stock, more active pursuit of growth via acquisitions, and greater use of stock options in employee compensation. We also posit that barter transactions might be an inexpensive way for firms to evaluate the viability of future marketing or content alliances with potential partners. Finally, we predict constraints on management discretion to be related to the reputation/quality of the firm's auditor and underwriter, and the extent of management ownership.

We find that firms with greater cash burn rates and higher levels of activity on Motley Fool message boards are consistently associated with barter and grossed-up revenue reporting. This suggests that the pressure to seek external funding and the extent of active individual investor interest in a firm influence Internet managers' use of allegedly aggressive revenue reporting practices. In addition, it appears that firms reporting barter revenue are more likely to enter into marketing and content alliances, suggesting the potential for future alliances may be another motivation for managers to enter into barter transactions.

Keywords: tax, VAT, fiscal policy

JEL Classification: M41, M43, H25, G24

Suggested Citation

Bowen, Robert M. and Davis, Angela K. and Rajgopal, Shivaram, Determinants of Revenue Reporting Practices for Internet Firms. Contemporary Accounting Research, Vol. 19, No. 4, Winter 2002. Available at SSRN:

Robert M. Bowen

University of San Diego - Department of Accountancy ( email )

223 Olin Hall
5998 Alcalá Park
San Diego, CA
United States
619.260.2385 (Phone)


University of Washington - Foster School of Business ( email )

Box 353226
University of Washington
Seattle, WA 98195-3226
United States


Angela K. Davis

University of Oregon ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-3210 (Phone)

Shivaram Rajgopal (Contact Author)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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