Date of Award

4-27-2006

Degree Type

Closed Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Accountancy

First Advisor

Lawrence D. Brown - Chair

Abstract

I conduct an examination of the deferred revenue account. I provide descriptive evidence of deferred revenue both at an industry-level and a macro-level, and I examine whether managers use discretion in deferred revenue around earnings benchmarks. I develop a model to measure the normal change in short-term deferred revenue, and examine how the abnormal change varies across the pre-managed distribution of three common earnings benchmarks. My results show that managers delay recognition of revenue using deferred revenue when pre-managed earnings exceed benchmarks by a large margin, and accelerate the recognition of revenue using deferred revenue when premanaged earnings just miss or miss benchmarks by a large amount. I document the prevalence of accelerated revenue recognition, and show that meeting or just beating the annual consensus analyst forecast is where the most cases of suspected accelerated revenue recognition occur. The results are next strongest for the avoidance of earnings decrease benchmark and weakest for the avoidance of loss benchmark. I examine whether conventional abnormal accrual models reflect discretion in deferred revenue, and whether discretion in deferred revenue is associated with lower earnings quality. I show that deferred revenue changes are a leading indicator of future earnings. My results indicate that discretion in revenue can lower the predictability of sales regardless of whether it is of an aggressive or conservative nature.

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