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

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