The Impact of Accounting Standard Adoption Complexity on Financial Reporting Quality and Market Outcomes: Evidence from ASC 606

55 Pages Posted: 29 Apr 2021 Last revised: 1 May 2021

See all articles by Jaehan Ahn

Jaehan Ahn

Northeastern University - Accounting Group

Udi Hoitash

Northeastern University - Accounting Group

Roy Schmardebeck

The University of Tennessee, Knoxville - Haslam College of Business, Accounting and Information Management

Date Written: April 28, 2021

Abstract

This study examines the impact of accounting standard adoption complexity on financial reporting quality and market outcomes. We capture adoption complexity by uniquely using adoption-related disclosures required under Staff Accounting Bulletin (SAB) 74. We examine the adoption outcomes of the new revenue recognition standard under Accounting Standards Codification (ASC) 606. This standard is one of the most significant changes to accounting standards in recent times. Among materially impacted companies, we find that those with greater adoption complexity experience lower revenue-related financial reporting quality and lower information asymmetry in the post-adoption period. Importantly, we find that reductions in information asymmetry only occur for companies with complex adoptions and higher adoption quality, suggesting that the market discerns between high- and low-quality adopters. Overall, our results suggest that while the adoption of ASC 606 is challenging, it is associated with market benefits. Notably, they underscore the importance for future research and market participants that evaluate adoption outcomes to consider adoption complexity and adoption quality. Otherwise, they could miss an important facet of the adoption and may attribute adoption outcomes less precisely.

Keywords: Revenue recognition, financial statement misstatements, SEC comment letters, information asymmetry, SAB 74, ASC 606, accounting standard adoption

Suggested Citation

Ahn, Jaehan and Hoitash, Udi and Schmardebeck, Roy, The Impact of Accounting Standard Adoption Complexity on Financial Reporting Quality and Market Outcomes: Evidence from ASC 606 (April 28, 2021). Available at SSRN: https://ssrn.com/abstract=3835849 or http://dx.doi.org/10.2139/ssrn.3835849

Jaehan Ahn

Northeastern University - Accounting Group ( email )

404 Hayden Hall
360 Huntington Ave.
Boston, MA 02115
United States

Udi Hoitash (Contact Author)

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States
671-373-5839 (Phone)

Roy Schmardebeck

The University of Tennessee, Knoxville - Haslam College of Business, Accounting and Information Management ( email )

The Boyd Center for Business and Economic Research
Knoxville, TN 37996
United States

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