Impact of Revenue Recognition on Future Performance

The SEC issued Staff Accounting Bulletin No. 101 regarding the revenue recognition. Critics of the bulletin stated that it would eliminate industry-accepted revenue recognition practices and reduce quality of reported earnings because revenues recorded prior to the completion of the earnings process contains value relevant information about future performance. The research investigates these hypotheses using the sample of firms that accelerated revenue prior to SAB and a matched set of firms that were unaffected by this regulation. In preadoption period SAB firm report more positive earnings than they do in post-adoption period and than unaffected firm.