The Liquidity, Precision, and Comparability Effects of ASC 606: Revenue from Contracts with Customers
52 Pages Posted: 26 Jan 2020 Last revised: 10 Mar 2020
Date Written: January 1, 2020
I examine the liquidity effect of the implementation of ASC 606: Revenue from contracts with customers. I find that the implementation of ASC 606 increases liquidity. Next, I examine the channels through which the implementation of the standard affects liquidity. Theory suggests that the implementation of standards can affect liquidity through either the precision channel, i.e., the change in the accounting report’s ability to reflect economic events, the comparability channel, i.e., the increase in comparability across reporting entities, or both. I find that the implementation of the new revenue standard is associated with increases in both precision and comparability, which are, in turn, associated with an increase in liquidity. I further show that firms that experience an increase in neither precision nor comparability do not experience an increase in liquidity.
Keywords: Revenue recognition, FASB, liquidity, comparability, ASC 606, ASU 2014-09
JEL Classification: D82, G00, G14, G18, M41
Suggested Citation: Suggested Citation