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Strategic revenue recognition to achieve earnings benchmarks


  • Caylor, Marcus L.


I examine whether managers use discretion in revenue recognition to avoid three earnings benchmarks. I find that managers use discretion in both accrued revenue (i.e., accounts receivable) and deferred revenue (i.e., advances from customers) to avoid negative earnings surprises, but find little evidence that discretion is used to avoid losses or earnings decreases. For a common sample of firms with both deferred revenue and accounts receivable, I find evidence that managers do not prefer to exercise discretion in either account. However, further tests show that managers preferred to use discretion in deferred revenue before the Sarbanes-Oxley Act of 2002 went into effect, consistent with them choosing to manage an account with the lowest real costs to the firm (i.e., future cash consequences). My results suggest that the revenue recognition joint project undertaken by the FASB and IASB to reduce managerial estimation in revenue recognition may have the unintended consequence of leading to greater real costs imposed on shareholders as firms are likely to use even greater discretion in accounts receivable.

Suggested Citation

  • Caylor, Marcus L., 2010. "Strategic revenue recognition to achieve earnings benchmarks," Journal of Accounting and Public Policy, Elsevier, vol. 29(1), pages 82-95, January.
  • Handle: RePEc:eee:jappol:v:29:y::i:1:p:82-95

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    References listed on IDEAS

    1. David Burgstahler & Michael Eames, 2006. "Management of Earnings and Analysts' Forecasts to Achieve Zero and Small Positive Earnings Surprises," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5-6), pages 633-652.
    2. Warren Bailey & Haitao Li & Connie X. Mao & Rui Zhong, 2003. "Regulation Fair Disclosure and Earnings Information: Market, Analyst, and Corporate Responses," Journal of Finance, American Finance Association, vol. 58(6), pages 2487-2514, December.
    3. Bartov, Eli & Givoly, Dan & Hayn, Carla, 2002. "The rewards to meeting or beating earnings expectations," Journal of Accounting and Economics, Elsevier, vol. 33(2), pages 173-204, June.
    4. Caylor, Marcus L. & Lopez, Thomas J. & Rees, Lynn, 2007. "Is the value relevance of earnings conditional on the timing of earnings information?," Journal of Accounting and Public Policy, Elsevier, vol. 26(1), pages 62-95.
    5. Leuz, Christian & Nanda, Dhananjay & Wysocki, Peter D., 2003. "Earnings management and investor protection: an international comparison," Journal of Financial Economics, Elsevier, vol. 69(3), pages 505-527, September.
    6. Ron Kasznik, 2002. "Does Meeting Earnings Expectations Matter? Evidence from Analyst Forecast Revisions and Share Prices," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 727-759, June.
    7. Brown, Lawrence D. & Ngo Higgins, Huong, 2001. "Managing earnings surprises in the US versus 12 other countries," Journal of Accounting and Public Policy, Elsevier, vol. 20(4-5), pages 373-398.
    8. repec:bla:joares:v:37:y:1999:i:1:p:57-81 is not listed on IDEAS
    9. Kothari, S.P. & Leone, Andrew J. & Wasley, Charles E., 2005. "Performance matched discretionary accrual measures," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 163-197, February.
    10. Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 99-126, December.
    11. Subramanyam, K. R., 1996. "The pricing of discretionary accruals," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 249-281, October.
    12. Brown, Lawrence D. & Higgins, Huong N., 2005. "Managers' forecast guidance of analysts: International evidence," Journal of Accounting and Public Policy, Elsevier, vol. 24(4), pages 280-299.
    13. Abarbanell, Jeffery & Lehavy, Reuven, 2003. "Biased forecasts or biased earnings? The role of reported earnings in explaining apparent bias and over/underreaction in analysts' earnings forecasts," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 105-146, December.
    14. Mathew, Prem G. & Michayluk, David & Kofman, Paul, 2007. "Are foreign issuers complying with Regulation Fair Disclosure?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(3), pages 246-260, July.
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    Cited by:

    1. Masahiro Enomoto & Tomoyasu Yamaguchi, 2015. "Discontinuities in Earnings and Earnings Change Distributions after J-SOX Implementation: Empirical evidence from Japan," Discussion Paper Series DP2015-26, Research Institute for Economics & Business Administration, Kobe University, revised Oct 2016.


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