Motives for Early Revenue Recognition: Evidence from Sec Staff Accounting Bulletin (Sab) 101

36 Pages Posted: 12 Jan 2003

See all articles by Jennifer Lynne M. Altamuro

Jennifer Lynne M. Altamuro

Villanova University - Accountancy

Anne Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Joseph Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: 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.

Keywords: revenue recognition, earnings management, earnings benchmarks, financial reporting

JEL Classification: M41, M43, M44, M49

Suggested Citation

Altamuro, Jennifer Lynne M. and Beatty, Anne L. and Weber, Joseph Peter, Motives for Early Revenue Recognition: Evidence from Sec Staff Accounting Bulletin (Sab) 101 (August 1, 2002). Available at SSRN: https://ssrn.com/abstract=335780 or http://dx.doi.org/10.2139/ssrn.335780

Jennifer Lynne M. Altamuro

Villanova University - Accountancy ( email )

United States

Anne L. Beatty (Contact Author)

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Joseph Peter Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-4310 (Phone)

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