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
Date Written: April 28, 2021
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
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