Heterogeneity in the Financial-Reporting Effects of ASC 606 Adoptions: Evidence from an Industry-Focused Approach

63 Pages Posted: 19 May 2022 Last revised: 27 Sep 2022

See all articles by Diana Choi

Diana Choi

Purdue University - Krannert School of Management

Sehwa Kim

Columbia University - Columbia Business School

Xue Wang

Ohio State University - Fisher College of Business

Date Written: September 23, 2022

Abstract

This paper examines the financial-reporting effects of ASC 606 (Revenue from Contracts with Customers) adoptions. Given the expected heterogeneous effects of ASC 606 for companies in different industries, we employ an industry-focused approach to evaluate the effects of ASC 606. Specifically, we focus on firms in the software industry, which is expected to be more significantly affected by ASC 606, and use firms in the electronic computer industry as a control group. We find the adoption of ASC 606 is associated with improvement in financial-statement comparability, informativeness, and mapping of revenue accruals to cash collections, for firms in the software industry compared with firms in the electronic computer industry. We also document significant increases in liquidity for software firms relative to electronic computer firms, reinforcing our inferences of ASC 606’s effects on improving financial reporting. Collectively, these findings based on the industry-focused approach suggest the importance of controlling for underlying economic comparability and pre-existing accounting differences, supporting that the evaluation of the effects of new accounting standards can benefit from a series of narrow-sample studies.

Keywords: Revenue Recognition, ASC 606, Financial Reporting Quality, Software Industry

JEL Classification: G10, G18, L8, M41, M48

Suggested Citation

Choi, Diana and Kim, Sehwa and Wang, Xue, Heterogeneity in the Financial-Reporting Effects of ASC 606 Adoptions: Evidence from an Industry-Focused Approach (September 23, 2022). Available at SSRN: https://ssrn.com/abstract=4111345 or http://dx.doi.org/10.2139/ssrn.4111345

Diana Choi

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Sehwa Kim (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Xue Wang

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-1330 (Phone)
614-292-2118 (Fax)

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