Principal-versus-Agent Considerations in Revenue Recognition and the Impact of ASC 606

53 Pages Posted: 19 May 2022 Last revised: 12 Jun 2023

See all articles by Kai Du

Kai Du

Pennsylvania State University

Henock Louis

Pennsylvania State University - Smeal College of Business

Shuyang Wang

Northeastern University - Accounting Group

Date Written: May 1, 2023

Abstract

Using a data set compiled through textual analysis of SEC filings and manual collection, we show that (i) firms with principal-versus-agent (PA) exposures face heightened compliance risk and audit fees, although there is no evidence that they have lower revenue quality; (ii) investors attach greater weight to agents’ revenue surprises; and (iii) analysts face greater difficulty forecasting PA firms’ revenues. After the ASC 606 adoption, compliance risk and audit fees generally decreased for PA firms. Moreover, the weight investors place on revenue surprises of mixed-type firms (those classified as both principals and agents) decreased, and analysts’ difficulty in forecasting those firms’ revenue increased. The overall evidence suggests that the gatekeepers have been effective in handling some of the complexities associated with PA considerations, although there is still room for improving the usefulness of revenue information to investors and analysts, particularly for firms with mixed classifications.

Keywords: revenue recognition; principal-versus-agent considerations; ASC 606; compliance risk; audit fee; revenue quality; revenue response coefficient; analyst forecasts

JEL Classification: L86, M41, M42, M48

Suggested Citation

Du, Kai and Louis, Henock and Wang, Shuyang, Principal-versus-Agent Considerations in Revenue Recognition and the Impact of ASC 606 (May 1, 2023). Available at SSRN: https://ssrn.com/abstract=4111573 or http://dx.doi.org/10.2139/ssrn.4111573

Kai Du

Pennsylvania State University ( email )

University Park, PA 16802
United States

Henock Louis (Contact Author)

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802-3306
United States
814-865-4160 (Phone)
814-863-8393 (Fax)

Shuyang Wang

Northeastern University - Accounting Group ( email )

421C Hayden Hall
360 Huntington Ave
Boston, MA 02115
United States

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