Graduation Year

2025

Date of Submission

12-2024

Document Type

Open Access Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Professor Ricardo Fernholz

Reader 2

Professor George Batta

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Terms of Use for work posted in Scholarship@Claremont.

Rights Information

© 2024 Morgan Schilling

Abstract

This paper investigates earnings management practices within the U.S. tech industry, focusing on firms that meet or just beat analyst EPS expectations. I specifically built off the Stubben (2010) model that used discretionary revenue to identify potential mismanagement across multiple industries. The modified model incorporates deferred revenue as well as accounts receivable to identify revenue recognition practices in an industry where subscription based revenue is highly relevant. I hypothesize that tech firms with aggressive revenue recognition strategies, particularly those with higher levels of accounts receivable, are more likely to engage in earnings management in order to meet EPS targets. A sample of up to 2,502 data points from 2009 to 2022, extracted from COMPUSTAT and I/B/E/S databases, is analyzed using regression models to examine the relationship between revenue changes and discretionary revenue recognition. The results indicate significant patterns of aggressive recognition in the fourth quarter, suggesting that tech firms may employ earnings management strategies to meet year-end benchmarks. However, there are mixed results in that revenue recognition patterns remain similar for firms that just-miss EPS expectations and that that meet or just beat them leaving more research to be done. This study contributes to the literature by providing a deeper understanding of revenue management practices in a specific industry. The findings offer valuable insight for financial analysts, auditors, and policymakers, emphasizing the importance of transparency in revenue recognition practices.

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