Revenue Recognition, Information Asymmetry, and Analyst Forecast Accuracy

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Abstract

This study investigates the relation between changes in revenue recognition rules; specifically the releases of SEC Staff Accounting Bulletin No. 104 (SAB 104) and the FASB’s 2010 Exposure Draft of a proposed Accounting Standards Update of Topic 605 (ASU Topic 605), information asymmetry and analysts’ forecast accuracy. We examine the change in information asymmetry around SAB 104’s and ASU Topic 605’s releases to determine and compare their capital market consequences. Then we examine the relationship between SAB 104, ASU Topic 605 and analysts’ earnings forecast accuracy. The sample consists of bid-ask price quotes (proxy for information asymmetry) and analyst earnings forecasts covering the two pre- and post-SAB 104 periods of 2002-2003 and 2004-2005 and also covering the two pre- and post ASU Topic 605 periods of 2007-2008 and 2009-2010 for software firms. Tests of revenue recognition and information asymmetry indicate that SAB 104 and ASU Topic 605 reduce information asymmetry for treatment firms. It is also found that SAB 104 and ASU Topic 605 increase analyst forecast accuracy for treatment firms. The results of this study will allow accountants, managers, investors, and regulators to assess whether or not revenue recognition rule changes have their intended effects.

Authors

• Porschia Nkansa, University of Memphis

• Carolyn M Callahan, University of Memphis