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    Revenue Recognition, Earnings Management, and Earnings...
    research summary posted May 21, 2014 by Jennifer M Mueller-Phillips, last edited May 25, 2014, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.06 Earnings Management, 14.0 Corporate Matters, 14.01 Earnings Management 
    Revenue Recognition, Earnings Management, and Earnings Informativeness in the Semiconductor Industry
    Practical Implications:

    The results of this study suggest that manufactures that sell products through the distribution channel should defer revenue recognition until product return and pricing adjustment uncertainties are resolved. This information is potentially informative for regulators and standard-setters. This study also extends upon a growing stream of research that examines the implications of revenue recognition for firms in different industries and can help students, practitioners, and other financial statement users better understand revenue recognition methods and their associations with earnings management and earnings informativeness.


    For more information on this study, please contact Stephanie J. Rasmussen.


    Rasmussen, S. J. 2013. Revenue Recognition, Earnings Management, and Earnings Informativeness in the Semiconductor Industry. Accounting Horizons 27 (1).

    distributors; earnings informativeness; earnings management; manufacturers; revenue recognition
    Purpose of the Study:

    Revenue recognition is often one of the most important and complex accounting topics, and it is imperative for financial statement users to have a strong understanding of revenue recognition and its implication for evaluating firm performance. For the manufacturing industry, product sales to distributors experience product return and pricing adjustment uncertainties until the products are resold to end-customers. Such manufacturers recognize revenue when products are delivered to distributors (sell-in), when distributors resell products (sell-through), or under some combination of these methods. This study examines the implications of these revenue recognition methods for firms in the semiconductor industry. 

    Design/Method/ Approach:

    The following hypotheses were first developed for testing:


    H1a: The incidence of earnings management is less likely for sell-through firms compared to sell-in firms


    H1b: The incidence of earnings management is less likely for combination firms compared to sell-in firms.


    H2: Earnings informativeness does not differ among sell-in, sell-through, and combination firms.


    A series of regression models is used to test all three hypotheses. The sample used is quarterly data for all semiconductor firms in the Compustat Fundamentals Quarterly database during 2001-2008. The sample begins in 2001 because SAB 101, which offered additional guidance on revenue recognition disclosures, became effective in that year. The final sample includes 80 unique semiconductor firms with required data for 1,572 firm-quarters. 

    • Firms deferring revenue recognition until product return and price adjustment uncertainties are partly or fully resolved are less likely to meet or beat analysts’ consensus earnings forecast than firms immediately recognizing revenue for sales to distributors.
    • Earnings management is more likely when firms recognize revenues before all uncertainties are resolved. 
    • Earnings are more informative for firms that defer revenue recognition until products are resold to end-customers. 
    Corporate Matters, Risk & Risk Management - Including Fraud Risk
    Earnings Management, Earnings Management

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