Motives for Early Revenue Recognition: Evidence from Sec Staff Accounting Bulletin (Sab) 101
36 Pages Posted: 12 Jan 2003
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: Suggested Citation
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