Effects of the New Revenue Recognition Standard (ASC 606) on the Informativeness of Earnings and Revenues

Abstract

We show that earning announcements are accompanied by larger decreases in the bid-ask spread, the price impact of trades, return volatility, and larger increases in the quoted depth, trading volume, and price efficiency after implementing the new revenue recognition standard (ASC 606). The implementation of ASC 606 is associated with a significant increase in the accuracy of analysts’ revenue and earnings forecasts and a decrease in the post-earnings announcement drift (PEAD). These results indicate that ASC 606 has improved the informativeness of earnings and changed the effect of earnings announcements on the firm’s information and trading environments accordingly. 

Keywords: Liquidity, Information asymmetry, Revenue recognition standard, ASC 606, Earnings announcements, Earnings informativeness

JEL Classification: G10, G14, G18, M41, M48