Corporate governance quality and premature revenue recognition: evidence from the UK

Corporate governance quality and premature revenue recognition: evidence from the UK PurposeSince 2005, wide-ranging concerns have been raised about misleading revenue recognition practices, especially during and after the 2008–2009 global financial crisis. There is a lack of research into the relationship between corporate governance (CG) mechanisms and premature revenue recognition (PRR). The paper aims to discuss these issues.Design/methodology/approachThis paper uses a generalised least squares regression analysis of a sample of 854 FTSE 350 firm–year observations. Stubben (2010) discretionary revenue (DR) model is used to measure PRR as it is considered less biased, better specified and more likely to reduce measurement error than accrual models.FindingsThe results suggest that the size of audit committees plays an effective role in constraining PRR. Moreover, PRR is more likely to be curbed in the presence of small boards comprising a higher proportion of non-executive directors. Additional tests reveal that the relationship between board size and PRR is non-linear.Research limitations/implicationsThe findings address the concerns of corporate firms, capital providers, UK regulators and standard-setters regarding misleading revenue recognition practices and should be considered while setting new governance reform recommendations in response to changing economic conditions.Originality/valueThis is the first study that adopts the DR model of Stubben (2010) to capture PRR and examines its association with CG internal mechanisms. Moreover, the paper considers an important time period – from 2005 to 2013 – in which many significant developments took place. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Managerial Finance Emerald Publishing

Corporate governance quality and premature revenue recognition: evidence from the UK

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1743-9132
DOI
10.1108/IJMF-02-2018-0047
Publisher site
See Article on Publisher Site

Abstract

PurposeSince 2005, wide-ranging concerns have been raised about misleading revenue recognition practices, especially during and after the 2008–2009 global financial crisis. There is a lack of research into the relationship between corporate governance (CG) mechanisms and premature revenue recognition (PRR). The paper aims to discuss these issues.Design/methodology/approachThis paper uses a generalised least squares regression analysis of a sample of 854 FTSE 350 firm–year observations. Stubben (2010) discretionary revenue (DR) model is used to measure PRR as it is considered less biased, better specified and more likely to reduce measurement error than accrual models.FindingsThe results suggest that the size of audit committees plays an effective role in constraining PRR. Moreover, PRR is more likely to be curbed in the presence of small boards comprising a higher proportion of non-executive directors. Additional tests reveal that the relationship between board size and PRR is non-linear.Research limitations/implicationsThe findings address the concerns of corporate firms, capital providers, UK regulators and standard-setters regarding misleading revenue recognition practices and should be considered while setting new governance reform recommendations in response to changing economic conditions.Originality/valueThis is the first study that adopts the DR model of Stubben (2010) to capture PRR and examines its association with CG internal mechanisms. Moreover, the paper considers an important time period – from 2005 to 2013 – in which many significant developments took place.

Journal

International Journal of Managerial FinanceEmerald Publishing

Published: Feb 4, 2019

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