The Impact of ASC 606 and Firm Characteristics on Revenue Manipulation

• In Event: Financial Accounting and Reporting

Abstract

The implementation of ASC 606 significantly changed revenue recognition practices for many firms in the capital market by increasing the level of discretion required to record revenue amounts. I examine the impact of this increase in discretion on revenue manipulation. I find that firms near analyst revenue targets have increased levels of discretionary revenues under ASC 606, indicating increased revenue manipulation. Further analysis shows that firms characterized as having increased opportunity to manage revenues relative to their peers use ASC 606 opportunistically to manipulate revenues upwards. Specifically, firms with more complex revenue operations and shorter revenue cycles are associated with increased revenue manipulation under ASC 606. This paper is one of the first to provide evidence of capital market consequences stemming from ASC 606, while also highlighting the impact of firm characteristics on the choice to manage revenues.

Author

• Benjamin Hubbard, Purdue University