Banking Investigate

Does More Conservative Revenue Recognition Improve The Informativeness Of Earnings?

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Executive Summary

Watts (2003a) and Watts and LaFond (2007) provide evidence that more conservative earnings serve an informational role in equity valuation. The study tests this assertion using a sample of treatment firms that changed their revenue recognition policies to meet the requirements of a more conservative reporting regime. The results provide important evidence for the Financial Accounting Standards Board who is currently considering two revenue recognition models that differ with respect to their degrees of conservatism envisioned.

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