Strategic Revenue Recognition to Avoid Negative Earnings Surprises

Marcus L. Caylor University of South Carolina Moore School of Business 1705 College Street Columbia, SC 29208 Email: marcus.caylor@moore.sc.edu Office: 803-777-6081 Fax: 803-777-0712

This study is based in part on my doctoral dissertation at Georgia State University. I am grateful for helpful comments and suggestions from my dissertation committee: Larry Brown (chair), Lynn Hannan, Jayant Kale, and Siva Nathan. This paper has also benefited from the helpful comments and suggestions of Ashiq Ali, Tony Chen, Bill Cready, Robert Freeman, Artur Hugon, Scott Jackson, Ross Jennings, Steve Kachelmeier, Bill Kinney, Krishna Kumar, Yen Lee, Andrew Leone, Tom Lopez, Arianna Pinello, Suresh Radhakrishnan, Galen Sevcik, Scott Vandevelde, Rich White and workshop participants at the 2006 American Accounting Association Annual Meetings, Georgia State University, the University of South Carolina, the University of Texas at Austin and the University of Texas at Dallas. I am grateful to Thomson Financial/I/B/E/S for providing data on analysts' earnings forecasts.

Electronic copy of this paper is available at: http://ssrn.com/abstract=885368

Strategic Revenue Recognition to Avoid Negative Earnings Surprises

Abstract I examine whether managers use discretion in two accounts related to revenue recognition, accounts receivable and deferred revenue, to avoid negative earnings surprises. I find that managers use discretion in both accounts to avoid negative earnings surprises. For a common sample of firms with both deferred revenue and accounts receivable, I show that managers prefer to exercise discretion in deferred revenue vis-vis accounts receivable. I distinguish between two theories for why managers prefer to manage a deferral rather than an accrual: lower disclosures versus lower costs to manage (no future cash consequences). I find that firms using gross accounts receivable to beat the analyst benchmark are not assessed a lower premium, indicating that disclosure is not an explanation. My results suggest that if given the choice, managers prefer to use accounts that do the least harm to the firm (i.e., no future cash consequences).

Keywords: Revenue recognition, earnings surprises, earnings management, accounts receivable, deferred revenue. Data availability: All data are available from public databases identified in the paper.

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Electronic copy of this paper is available at: http://ssrn.com/abstract=885368

Strategic Revenue Recognition to Avoid Negative Earnings Surprises

1. Introduction Revenue recognition is one of the most important issues facing firms today, usually representing the largest line item on income statements. Dechow, Sloan, and Sweeney (1996) find that SEC restatements generally resulted from improperly recognized revenues, suggesting this as a powerful setting to examine earnings management. Depending on the nature of a firms business, there are two accounts that relate to the amount of revenue recognized in an accounting period: deferred revenue and accounts receivable.1 I examine both accounts to see if discretion in revenue recognition is used to avoid negative earnings surprises. Accounts receivable and deferred revenue are alternative ways for recognizing revenue so it represents a unique opportunity to examine how managers choose between two rather different types of revenue management. I examine whether firms with both accounts available to them express a preference for discretion in one account versus the other. I develop two theories that suggest that discretion in deferred revenue would be preferred. First, gross accounts receivable is managed primarily through real activities, such as easing credit policies. Management of deferred revenue, on the other hand, represents a situation where cash has already been received. Thus, management of deferred revenue relates more to manipulation of estimates. Managing gross accounts

Deferred revenue goes by several other names including advances from customers, unearned revenue and revenue received in advance. Surprisingly, little research has examined the deferred revenue account. The only study that directly examines this account is Bauman (2000). Using a sample of 22 firms from the publishing industry, he finds that sales increases in the current year do not persist into the future unless accompanied by increases in deferred revenue, suggesting that deferred revenues are a leading indicator of future earnings.

receivable should be more costly to firms as it relates to accelerating sales where cash has not been collected yet. Thus, it has future cash consequences whereas deferred revenue does not. Second, deferred revenue is subject to less disclosure relative to accounts receivable. To determine which explanation is more descriptive, I examine whether investors discount the premium awarded to positive earnings surprises that result from discretion in gross accounts receivable. I construct a model for the normal change in short-term deferred revenue to determine abnormal changes in short-term deferred revenue.2 I derive a similar model for the normal change in gross accounts receivable to determine abnormal changes in gross accounts receivable.3 I create a pre-managed distribution of earnings by removing the

discretionary component related to the account in question (Dhaliwal, Gleason and Mills 2004; Frank and Rego 2006), and then test whether abnormal changes in each of these revenue accounts are higher than would be expected for firms with pre-managed earnings that just miss the analyst benchmark. Next, I examine firms with both accounts to see if managers prefer one account over the other as a means for revenue management. I test whether investors can see through attempts to manage accounts receivable to beat the analyst benchmark as evidenced by the magnitude of the premium awarded to these firms.

I use the short-term deferred revenue component and ignore the long-term component because the longterm component of deferred revenue does not reflect revenue that should have been recognized during the current period. 3 I use gross accounts receivable in lieu of net accounts receivable because abnormal changes in net accounts receivable could reflect changes in the allowance for bad debt.

My results indicate that both deferred revenue and accounts receivable are managed in an attempt to avoid negative earnings surprises.4 I provide evidence that firms prefer to exercise discretion in deferred revenue relative to accounts receivable when given the choice. I find that the premium awarded to beating analyst expectations is similar for both accounts so I rule out the lower disclosure cost explanation. My study makes several contributions to the literature. First, I provide the first descriptive evidence on deferred revenue, showing that many high technology industries have it on their balance sheets. Second, I provide evidence that discretion is used in revenue recognition to avoid negative earnings surprises. Third, my study is the first to examine a common sample of firms with two accounts available that differ in terms of transparency and costliness to see whether managers prefer to manage one type of account over another. I provide evidence that deferred revenue is the revenue account of choice, indicating that when given the choice, managers prefer to exercise discretion in a manner that minimizes costs to the firms. Fourth, I show that investors do not distinguish between varying levels of account disclosure when a firm beats the analyst benchmark. Fifth, I derive a discretionary model of deferred revenue for potential use in future research on discretionary deferrals. The remainder of my paper is organized as follows. The second section reviews the relevant literature and develops hypotheses. Section three introduces the research design. Section four provides results of my study, and section five contains implications and avenues for future research.

In a contemporaneous study, Stubben (2007) also finds that accounts receivable are used to exceed the analyst benchmark. However, his study does not examine deferred revenue nor does it examine whether a preference exists.

2. Hypotheses Development Firms with pre-managed earnings that just miss an earnings benchmark in the current period have incentives to accelerate revenue because they need current revenue to meet or just beat the current benchmark (Cheng and Warfield 2005; Healy 1985). Firms can recognize more revenue to meet or just beat earnings benchmarks via discretion in accounts receivable, deferred revenue or a combination of both. In two recent studies, researchers find no evidence that discretion is used in gross accounts receivable to avoid losses and earnings decreases (Marquardt and Weidman 2004; Roychowdhury 2006).5 Recent evidence suggests that the analyst benchmark is the most important benchmark sought by managers (Dechow, Richardson and Tuna 2003; Brown and Caylor 2005) so I focus on this benchmark to increase the power of my tests. I hypothesize that managers will use discretion in revenue to avoid negative earnings surprises. However, I may not find results for the analyst benchmark. First, I examine a post-SAB 101 environment where accounting regulations on revenue recognition are specifically written to prevent aggressive recognition (see SAB 101). However, Rountree (2006) finds that firms targeted by SAB 101 were less likely to be earnings managers and that deferred revenue was more likely to be targeted by SAB 101 suggesting that deferred revenue may be more likely to be affected in comparison to accounts receivable. Second, managers use other (non-revenue-based) accruals for avoiding negative surprises (Moehrle 2002; Frank and Rego 2006; among others) potentially mitigating the effect I

Marquardt and Weidman (2004) find that managers do not exercise discretion in gross accounts receivable to avoid an earnings decrease. Roychowdhury (2006) finds no significant evidence that gross accounts receivable are managed to avoid a loss. In untabulated analyses, I find similar results to both studies using gross accounts receivable and deferred revenue. For this analysis, I use the same methodology as discussed below and interval widths of 0.5% and 0.25% for the avoidance of loss and avoidance of earnings decreases benchmarks, respectively (Burgstahler and Dichev 1997).

expect to find for revenue-based accruals. Third, while using avoidance of negative surprises is more powerful than using other benchmarks, the fact that researchers find no evidence that discretion is used in gross accounts receivable to avoid losses and earnings decreases makes it possible that I will find nothing for the stronger earnings benchmark. I hypothesize that managers do use discretion in revenue recognition to avoid negative earnings surprises. More formally, my first two hypotheses are: HYPOTHESIS 1: Firms with pre-managed earnings that just miss the analyst benchmark have an abnormal increase in gross accounts receivable. HYPOTHESIS 2: Firms with pre-managed earnings that just miss the analyst benchmark have an abnormal decrease in short-term deferred revenue. According to the Financial Accounting Standards Board (FASB), revenue recognition involves consideration of two main factors: when is the revenue realizable and when is it considered to be earned (Statement of Financial Accounting Concepts No. 5 (paragraph 83))? In 1999, the Securities Exchange Commission (SEC) provided further guidance in Staff Accounting Bulletin (SAB) No. 101, which states that revenue can be recognized only when the following four criteria are met: 1) persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) the seller's price to the buyer is fixed or determinable, and 4) collectibility is reasonably assured. Major differences exist between manipulation of accounts receivable and shortterm deferred revenue. First, with deferred revenue, cash has already been received and a journal entry has been made. When the aforementioned four criteria for revenue recognition are considered, three of them have usually been met with the recording of

deferred revenue (i.e., persuasive evidence of an arrangement exists, the seller's price to the buyer is fixed or determinable, and collectibility is reasonably assured). Thus, discretion arises in deferred revenue as to when delivery has occurred or services have been rendered. Second, with deferred revenue, managers are less able to manipulate through real activities. For gross accounts receivable, managers accelerate the recognition of revenue through real activities manipulation, such as providing favorable credit terms, easing creditworthiness restrictions, and speeding up the shipment of goods.6 In contrast to gross accounts receivable, managers accelerate recognition of deferred revenue by increasing estimates of services provided.7 This causes manipulation of deferred revenue to be relatively less costly vis--vis accounts receivable in terms of its future cash consequences. For example, providing favorable credit terms to speed up the recognition of a receivable has future cash consequences. In addition, managing gross accounts receivable has long-term reputation effects with customers, even if it has no direct future cash consequences. For instance, a large supplier may push unwanted merchandise on small retailers to speed up recognition of a receivable. Third, information related to deferred revenue is disclosed at lower levels relative to accounts receivable. Whereas accounts receivable is always a prominent separate line item on the balance sheet, short-term deferred revenue is often an indistinguishable portion of the other current liabilities category on the balance sheet. In addition, since it is a deferral, it is absent from the cash flow statement in contrast to changes in accounts
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This can be managed through subjective estimates of how much revenue has been earned, but only apply to a very few industries where long-term construction projects exist. 7 While managers can use real activities manipulation to determine when a credit sale is recorded, with deferred revenue the use of real activities manipulation is less likely. For instance, it is unlikely that managers would withhold services to customers to reduce the amount of revenue recognized. Deferred revenue could be manipulated through altering contract terms, however, because a customer has to agree to the new terms, such an action is less likely to occur.

receivable so investors will find it difficult to determine if a change is unusually high (or low) relative to a change in sales. I expect managers to prefer discretion in deferred revenue relative to accounts receivable as a result of the real costs imposed by and/or the lower disclosure of accounts receivable. My third hypothesis is: HYPOTHESIS 3: Firms with deferred revenue will use less discretion in gross accounts receivable to avoid negative earnings surprises. My final hypothesis attempts to distinguish between the reasons why managers prefer deferred revenue over accounts receivable, real cash flow consequences or level of disclosure. If investors award firms that use gross accounts receivable to achieve positive earnings surprises a lower premium, then the level of disclosure matters in managements preference for discretion in deferred revenue. If investors do not give firms which use gross accounts receivable to achieve positive earnings surprises a lower premium, managers should not have any preference for their use related to disclosures. My final hypothesis examines these two views, allowing me to discriminate amongst the two theories: HYPOTHESIS 4a: The premium to beating is lower for firms that use discretion in gross accounts receivable. HYPOTHESIS 4b: The premium to beating is not lower for firms that use discretion in gross accounts receivable.

3. Sample Selection and Research Design Sample Selection I obtain annual earnings, short-term deferred revenue, accounts receivable, sales, total assets, cash flow from operations and other financial statement accounts from the 2005 Annual Compustat File. I obtain annual analyst earnings forecast data and reported annual earnings for computing earnings surprises from the split-unadjusted I/B/E/S Detail File. To be consistent with prior literature on earnings management (e.g., Burgstahler and Dichev 1997), I exclude utilities and financial firms (i.e., SIC codes between 4400 and 5000 and SIC codes between 6000 and 6500). I also exclude any firms related to public administration (i.e., SIC codes of 9000 or higher). Modeling Normal Changes in Gross Accounts Receivable To derive a model for the expected amount of gross accounts receivable in time t, I need to make certain assumptions. I assume that gross accounts receivable is some proportion of current periods sales, as accounts receivable are included in this periods sales.8 I also assume that gross accounts receivable are some proportion of next periods cash flow from operations, since accounts receivable will turn over in the next period. This implies that changes in gross accounts receivable should be positively related to contemporaneous changes in sales and future changes in cash flow from operations.9 I include both of these variables in my model to capture any non-discretionary component that is not captured by the other. Thus, if gross accounts receivable are a greater proportion of this periods sales or next periods cash flow from operations than

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This assumption is adopted from Dechow, Kothari, and Watts (1998). I find that changes in gross accounts receivable are significantly and positively correlated with both changes in current periods sales and changes in future periods cash flow from operations using both Pearson and Spearman correlations.

expected, more accounts receivable may have been recorded than expected.10 Based on these assumptions, I estimate abnormal changes in gross accounts receivable by running linear regressions by industry (2-digit SIC code) and fiscal year using all available firms with the requisite data:11 Gross A/R t / A t-1= 0 + 1*(1/ At-1) + 1*(St / A t-1) + 2*(CFOt+1 / A t-1) + t where: Gross A/R t = change in gross accounts receivable during year t (change in Compustat Annual Data Item 2 plus Compustat Annual Data Item 67), St = change in sales during year t (change in Compustat Annual Data Item 12), CFOt+1 = change in cash flow from operations during year t+1 (change in Compustat Annual Data Item 308), and A t-1= beginning of the year total assets (Compustat Annual Data Item 6). In addition to the scaled intercept term found in prior discretionary accrual studies, I also include a constant term based on Kothari, Leone and Wasley (2005) who find that it results in better-specified, more symmetric discretionary models.12 I compute the abnormal change in gross accounts receivable for the current period as the difference between the actual change in gross accounts receivable and the predicted (or expected) change obtained from these industry-year regressions. An abnormal increase in gross accounts receivable occurs when the actual change exceeds the predicted normal (1)

The opposite implies that less accounts receivable may have been recorded than expected. I estimate at the 2-digit level to be consistent with prior literature. I also winsorize all variables entering both of my discretionary models at the extreme (1st and 99th) percentiles of their respective distributions to be consistent with prior literature. In addition, I require at least eight industry-year observations to estimate the model. Roychowdhury (2006) uses a similar model. 12 Kothari, Leone, and Wasley (2005) include both a scaled and unscaled intercept term in their discretionary accrual models.
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change. Abnormally low growth in gross accounts receivable occurs when the actual change is less than the predicted normal change. Modeling Normal Changes in Deferred Revenue To derive a model for the expected amount of short-term deferred revenue, I make a similar set of assumptions to those made for accounts receivable modified for the opposite behavior of deferrals relative to accruals. More specifically, I assume that shortterm deferred revenue is a proportion of next periods sales, since deferred revenue is to be recognized in the next period. I also assume that short-term deferred revenue is a proportion of the current periods cash flow from operations, because deferred revenue in the current period is reflected in the current periods cash flow from operations. This implies that changes in short-term deferred revenue should be positively related to contemporaneous changes in cash flow from operations and future changes in sales.13 Thus, if short-term deferred revenue is a greater proportion of either the current periods cash flow from operations or next periods sales than expected, more short-term deferred revenue remains than expected. Based on these assumptions, I estimate abnormal changes in deferred revenue by running linear regressions by industry (2-digit SIC code) and fiscal year using all available firms with the requisite data:14,15 Def Revt / At-1= 0 + 1*(1/ At-1) + 1*(St+1/ At-1) + 2*(CFOt / At-1) + t where: (2)

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I find that changes in short-term deferred revenue are significantly and positively correlated with changes in future sales and changes in current periods cash flow from operations using both Pearson and Spearman correlations. 14 I require at least eight industry-year observations to estimate this model similar to the constraint for the gross accounts receivable model. 15 I chose a cross-sectional industry discretionary model in lieu of a firm-specific model due to data restrictions (i.e., a small time-series of data).

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Def Rev t = change in short-term deferred revenue during year t (change in Compustat Annual Data Item 356), St+1 = change in sales during year t+1 (change in Compustat Annual Data Item 12), CFOt = change in cash flow from operations during year t (change in Compustat Annual Data Item 308), and A t-1= beginning of the year total assets (Compustat Annual Data Item 6). I compute the abnormal change in deferred revenue for the current period as the difference between the actual change in deferred revenue and the predicted change from these industry-year regressions. An abnormal increase in deferred revenue occurs when the actual change exceeds the predicted change. Similarly, an abnormal decrease in deferred revenue occurs when the actual change falls short of the predicted change. My measure is a proxy for the change in deferred revenue relative to what the expected or normal value should be given changes in cash flow from operations and future sales.16 I use the short-term component and ignore the long-term component because the latter does not reflect revenue that should be recognized during the current period. Empirical Models I use pre-managed earnings in lieu of post-managed earnings because this best reflects ex-ante behavior. Pre-managed earnings are obtained by removing the discretionary component of earnings (Dhaliwal, Gleason, and Mills 2004; Frank and

In an attempt to provide some evidence on my model, I formed deciles based on the level of discretionary accruals for all firms in the Compustat universe for the same time period using a modified-Jones model and examined the mean abnormal change in deferred revenue within these deciles. An interesting feature of this comparison is that deferred revenue is likely to be only a small proportion of aggregate accruals that make up an average firm and discretionary deferred revenue will move in an opposite direction to aggregate discretionary accruals, thus any negative relation between the two will provide comfort that my model is effectively picking up discretionary behavior. Untabulated analyses reveal that for every decile the sign of mean abnormal changes in deferred revenue is opposite to the sign of mean discretionary accruals.

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Rego 2006; among others). To compute pre-managed earnings for gross accounts receivable, I subtract the abnormal change in gross accounts receivable from reported earnings. To compute pre-managed earnings for deferred revenue, I add the abnormal change in deferred revenue to reported earnings. I convert the abnormal change of the revenue account to an undeflated amount by multiplying by lagged total assets and then scaling by common shares outstanding used to calculate EPS (Compustat Annual Data Item #54) in order to adjust I/B/E/S reported earnings per share. I define a pre-managed earnings surprise in year t as pre-managed earnings in year t minus the consensus analyst forecast of earnings in year t.17 To test my first two hypotheses, I examine how abnormal changes in gross accounts receivable (deferred revenue) are related to instances where a firms premanaged earnings just misses the analysts forecast. I estimate the regression: AbnormalGross A/Rt (or AbnormalDef Revt) = 0 + 1* PREMANAGED_JUSTMISS t + 2* PRE-MANAGED_MEETJUSTBEAT t + 1*SIZEt-1 + 2*BMt-1 + t (3)

where Abnormal Gross A/R (AbnormalDef Rev ) is the abnormal change in gross accounts receivable (deferred revenue). PRE-MANAGED_JUSTMISS is defined as an indicator variable equal to 1 if a firm reports a pre-managed negative earnings surprise in year t of no more than 0.2% of the end of the prior fiscal years stock price. PREMANAGED_MEETJUSTBEAT is defined as an indicator variable equal to 1 if a firm reports a pre-managed non-negative earnings surprise in year t of less than 0.2% of the

I calculate the consensus annual earnings forecast based on the median of the last individual earnings forecasts made by all analysts in the 90-day period preceding the end of the fiscal year. This has the advantage over using I/B/E/S summary forecasts because it avoids the stale forecast problem.

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end of the prior fiscal years stock price.18 PRE-MANAGED_MEETJUSTBEAT is used as a natural reference group since these firms should have no motives to manage revenue. These firms were able to achieve the benchmark before discretion in revenue is considered. I expect to find a significant and positive (negative) coefficient on PREMANAGED_JUSTMISS for accounts receivable (deferred revenue). An F-test is conducted between PRE-MANAGED_JUSTMISS and PREMANAGED_MEETJUSTBEAT when PRE-MANAGED_JUSTMISS is significantly different from zero and PRE-MANAGED_MEETJUSTBEAT is of the same sign. To control for systematic differences in abnormal changes in gross accounts receivable, I include SIZE, the natural logarithm of a firms beginning of the year market value of equity. To control for growth opportunities, I include BM, the book-to-book ratio.19 The sample related to testing my first hypothesis pertaining to accounts receivable is 4,562 firm-year observations for fiscal years 2001-2003. My sample to test my second hypothesis pertaining to deferred revenue is 1,378 firm-year observations for fiscal years 2001-2003. Fiscal years before 2001 are not used because deferred revenue data coverage in Compustat begins in fiscal year 2000. Fiscal year 2004 is not included in my final samples because I require cash flow from operations one year ahead in order to compute the abnormal change in accounts receivable and I require sales one year ahead in order to compute the abnormal change in deferred revenue.

Any definition of small miss or small beat is arbitrary. My choice is based on prior research that has examined the avoidance of negative earnings surprises. I use a 0.2% interval width for earnings surprises consistent with Burgstahler and Eames (2006). An additional advantage of this choice is that it represents the best trade-off between the smallest interval width and the most observations to make reliable statistical inferences. However, my results are qualitatively similar using other interval widths, such as 0.3%. 19 I winsorize this ratio at the extreme percentiles of its distribution.

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To test my third hypothesis, I require firms to have both accounts receivable and deferred revenue. This reduces my sample to 962 firm-year observations. I then reestimate model 3 for this common sample. If my third hypothesis is correct, I should not find significance on PRE-MANAGED_JUSTMISS for gross accounts receivable. To test my last hypothesis, I estimate the following model:
CAR = 0 + 1*MISS + 2*BEAT + 3*BEAT*A/R + 4*BEAT*D/R + 5*BEAT*BOTH + *UE + t

(4)

where CAR is the buy-and-hold abnormal return using the CRSP value-weighted market index measured in a window extending from one day before the earnings announcement date to one day after the release of a firms 10-K to ensure adequate investor access to balance sheet information. The intercept in my model represents firms that meet analyst expectations. MISS is an indicator variable equal to 1 if the firm misses the analyst forecast, BEAT is an indicator variable equal to 1 if the firm beats the analyst forecast, BEAT*A/R is an indicator variable equal to 1 if the firm used accounts receivable to beat the analyst forecast, BEAT*D/R is an indicator variable equal to 1 if the firm used deferred revenue to beat the analyst forecast, BEAT*BOTH is an indicator variable equal to 1 if a firm used both accounts to beat the analyst forecast, and UE is the magnitude of unexpected earnings (I/B/E/S reported earnings less the consensus forecast deflated by stock price at the beginning of the returns period). Koh, Matsumoto and Rajgopal (2006) provide evidence suggesting that during and after the scandals period there is no penalty to missing expectations (see Table 2, panel A of their paper). Based on Koh et al. (2006), I expect to find no significance for MISS as my sample falls primarily into this time period. Consistent with prior studies

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(e.g., Lopez and Rees 2002), I expect a positive and significant coefficient on BEAT and UE. If the a (b) part of my fourth hypothesis is correct, I do (do not) expect a negative and significant coefficient on the interaction term BEAT*A/R. I do not offer expectations for BEAT*BOTH and BEAT*D/R. For this analysis, I do not require a common sample but instead include all firms in both my deferred revenue and accounts receivable samples. The sample for this analysis is 3,703 firm-year observations with at least one of these two accounts and the requisite CRSP data. 4. Results Descriptive Evidence Little is known about the deferred revenue account. I begin by providing some industry-specific evidence of this account. For fiscal year 2004, I find that 30.4% of firms reported non-zero short-term deferred revenue.20 Table 1 provides descriptive information for the 48 Fama-French (FF) industry groups for fiscal years 2001-2004, ranked in ascending order by percentage of firms in the industry with non-zero short-term deferred revenue (Fama and French 1997). All 48 FF industry groups have some firms with short-term deferred revenue on their balance sheets. The top ten industry groups in terms of percent of firms with short-term deferred revenue were Printing and Publishing (66.67%), Computers (55.56%), Business Services (51.14%), Measuring and Control Equipment (45.38%), Telecommunications (45.11%), Pharmaceutical Products (39.81%), Personal Services (37.22%), Electronic Equipment (35.65%), Defense (33.33%), and Medical Equipment (33.17%). With the exceptions of Printing and Publishing and Personal Services, the rest are high technology sectors that relate to medical or

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Firms with missing assets were excluded. I do not exclude utilities and financial firms for purposes of providing descriptive evidence in Table 1. A similar proportion is found for earlier years in my sample.

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computer/electronic technology. The bottom ten industry groups in terms of percent of firms with short-term deferred revenue were Banking (1.37%), Textiles (4.17%), Utilities (5.01%), Shipbuilding, Railroad Equip. (5.26%), Precious Metals (5.39%), Agriculture (6.45%), Aircraft (6.84%), Food Products (7.06%), Steel Works, Etc. (7.25%), and Rubber and Plastic Products (7.30%). --------------------------Insert Table 1 here ---------------------------Table 2 reports the mean coefficient estimates from estimating the models for the normal change in gross accounts receivable and the normal change in deferred revenue. T-statistics are computed by dividing the mean of the distribution across all industry-year observations for each of the variables in the model by the standard error of this distribution. --------------------------Insert Table 2 here ---------------------------The model for gross accounts receivable has an adjusted R-square of almost 37%. As expected, there is a significant and positive relationship between changes in gross accounts receivable and changes in current sales (coefficient = 0.0979; t-statistic = 14.27) and future cash flow from operations (coefficient = 0.0573; t-statistic = 2.92). The model for deferred revenue has an adjusted R-square of almost 30%. Also, as expected, there is a significant and positive relationship between changes in short-term deferred revenue

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and changes in future sales (coefficient = 0.0234; t-statistic = 4.45) and current cash flow from operations (coefficient = 0.0365; t-statistic = 1.94). Table 3 provides descriptive statistics for all firms with either accounts receivable or deferred revenue for fiscal years 2001-2003. Gross accounts receivable has a mean of nearly 291 million dollars and a median of nearly 17.69 million dollars. The mean change in gross accounts receivable is approximately 0.1% of beginning assets. Deferred revenue has a mean of nearly 40 million dollars and a median of nearly 2.14 million dollars. The mean change in deferred revenue is approximately 0.9% of beginning assets. By definition, the mean abnormal change in short-term deferred revenue and the mean abnormal change in gross accounts receivable are zero since I include a constant term in my discretionary models. --------------------------Insert Table 3 here ---------------------------Avoidance of Negative Earnings Surprises Results Table 4 reports the results of OLS regressions examining my first two hypotheses related to abnormal changes in gross accounts receivable and short-term deferred revenue. Consistent with my first hypothesis, I find that abnormal changes in gross accounts receivable are more positive than normal for PRE-MANAGED_JUSTMISS (coefficient = 0.0017; t-statistic = 1.65).21 I find a negative and significant coefficient on PRE-MANAGED_MEETJUSTBEAT. I also find a negative and significant coefficient on the book-to-market ratio and an insignificant coefficient on size. In the second

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All coefficient estimates are presented in decimal form. For instance, this coefficient translates into an abnormal increase in gross accounts receivable that was 0.17% of beginning total assets.

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column of Table 4, I also find support for my second hypothesis. More specifically, there is a negative and significant coefficient on PRE-MANAGED_JUSTMISS (-0.0061; tstatistic = -4.14) for abnormal changes in deferred revenue. I find an insignificant coefficient on PRE-MANAGED_MEETJUSTBEAT. In addition, neither control variable is significant.22 To provide some evidence on the prevalence of revenue recognition to avoid negative earnings surprises, I also conduct an analysis similar to that of Frank and Rego (2006). I examine the proportion of firms that use discretion in revenue accounts to cross over the analyst threshold. I find that 75.8% (72.7%) of firms that had pre-managed earnings just missing analyst forecasts were able to use discretion in gross accounts receivable (short-term deferred revenue) to meet or beat the benchmark. --------------------------Insert Table 4 here ---------------------------Do Managers Express a Preference for Revenue Management? Table 5 provides results related to my third hypothesis. Consistent with my expectations, I fail to find significant evidence that firms with deferred revenue use discretion in gross accounts receivable (coefficient = 0.0028; t-statistic = 1.33). I continue to find a significant and negative coefficient on abnormal changes in deferred revenue (coefficient = -0.0052; t-statistic = -3.00). An alternative explanation could be that these firms have a smaller stock of receivables than deferred revenue so these firms
To the extent that my proxy for discretionary revenue recognition contains measurement error, a correlation may be induced between pre-managed earnings and the abnormal change in revenue account (Leone and Rock 2002). However, it is unclear why such a relation would exist for only the PREMANAGED_JUSTMISS interval in relation to the other pre-managed intervals. Nonetheless, I perform two additional analyses. In the first, I regress the abnormal change in revenue account on pre-managed earnings and find insignificant coefficients for both revenue measures. I also include PREMANAGED_EARNINGS, the magnitude of pre-managed earnings, in the regressions reported in tables 45 to control for this correlation if it exists. I obtain qualitatively similar results.
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would not find discretion in accounts receivable to be as economically feasible. However, I find that these firms actually have a much higher mean stock of receivables than deferred revenue by a factor of 10 indicating that such an alternative explanation is not plausible. --------------------------Insert Table 5 here ---------------------------Is There a Differential Market Response To Using Discretion in Revenue to Beat Analysts Forecasts? Table 6 provides results pertaining to my final hypothesis. The a (b) portion of fourth hypothesis posits that the premium awarded to firms that beat analysts forecasts will (will not) be lower when discretion in gross accounts receivable is used. As expected, I find a significant and positive coefficient on BEAT (coefficient = 0.033; tstatistic = 2.14) and UE (coefficient = 0.134; t-statistic = 1.92). I find support for the b portion of my fourth hypothesis. The coefficient on BEAT*A/R is statistically insignificant (coefficient = -0.011; t-statistic = -0.84). The coefficients on BEAT*D/R and BEAT*BOTH are also statistically insignificant. Table 4 suggests that managements preference for discretion in deferred revenue is not because accounts receivable is more transparent, but rather because it is more costly.23

A caveat of this analysis is that both abnormal change models require one year-ahead variables so it is possible that I may not find results for this reason. This is particularly problematic for abnormal changes in deferred revenue where the variable with the heaviest weight in the predictive model is one-year-ahead. However, investors should still be able to use contemporaneous realizations of these variables in lieu of those to form assessments. I re-estimate the returns analysis using a definition of abnormal changes in gross accounts receivable that does not require one-year-ahead cash flow changes. I obtain qualitatively similar results using this definition suggesting that investors cannot see through manipulations of gross accounts receivable to beat analysts forecasts.

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--------------------------Insert Table 6 here ---------------------------5. Conclusions and Implications I examine whether managers use accounting discretion in two accounts related to revenue recognition, short-term deferred revenue and gross accounts receivable, to avoid negative earnings surprises. I find that managers accelerate the recognition of revenue using both accounts when pre-managed earnings miss the analyst benchmark by a small amount. Using a common sample, I find that managers prefer to exercise discretion in deferred revenue as opposed to accounts receivable to avoid negative earnings surprises. I distinguish between two competing theories that suggest why deferred revenue would be the preferred account. I rule out the explanation related to lower disclosure of deferred revenue by providing evidence that the premium to beating the analyst benchmark is not reduced when discretion in accounts receivable is used. I conclude that the lower cost of discretion in deferred revenue is the reason for the preference. While some allege that managers are only short-term focused at the expense of long-term value creation, my results suggest that managers prefer the revenue recognition mechanism that has the least future cash consequences. However, if managers do not have a choice they will choose a mechanism that does have future consequences in order to avoid negative surprises. Finally, I introduce a discretionary model for deferred revenue that future researchers can use when studying deferrals. I close with some suggestions for future research. One avenue for future research is to examine how discretion in deferred revenue is used to maintain sales momentum

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(i.e., a string of sales increases). Livnat (2004) shows that revenue surprises are related to post-earnings-announcement drift, so one promising avenue is to examine how deferred revenue relates to post-earnings-announcement drift. Another avenue is to examine how analysts use changes in deferred revenue to formulate their revenue forecasts. Future studies could examine whether and to what extent managers substitute management of revenue recognition accounts in lieu of expense recognition accounts. Zhang (2005) shows that early revenue recognition for software firms in the early 1990s are associated with a lower time-series predictability of reported revenue. A related issue that could be examined is whether discretion used to delay revenue recognition has greater predictive ability than discretion used to accelerate revenue recognition.

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References
Bauman, M. The Unearned Revenue Liability and Firm Value: Evidence from the Publishing Industry. Working paper, University of Illinois at Chicago, 2000. Brown, L., and M. Caylor. A Temporal Analysis of Quarterly Earnings Thresholds: Propensities and Valuation Consequences. The Accounting Review (April 2005), 423440. Burgstahler, D., and I. Dichev. Earnings Management to Avoid Earnings Decreases and Losses. Journal of Accounting and Economics (December 1997), 99-126. Burgstahler, D., and M. Eames. Management of Earnings and Analysts' Forecasts to Achieve Zero and Small Positive Earnings Surprises. Journal of Business Finance & Accounting 33 (June/July 2006), 633-652. Cheng, Q., and T. Warfield. 2005. Equity Incentives and Earnings Management. The Accounting Review (April 2005), 441-476. Dechow, P., S. Kothari, and R. Watts. The Relation between Earnings and Cash Flows. Journal of Accounting and Economics (May 1998), 133-168. Dechow, P., S. Richardson, and I. Tuna. Why are Earnings Kinky? An Examination of the Earnings Management Explanation. Review of Accounting Studies 8 (June-September 2003), 355-384. Dechow, P., R. Sloan, and A. Sweeney. Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC. Contemporary Accounting Research (Spring 1996), 1-36.

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Dhaliwal, D., C. Gleason, and L. Mills. Last-chance Earnings Management: Using the Tax Expense to Meet Analysts Forecasts. Contemporary Accounting Research (Summer 2004), 431-459. Fama, E., and K. French. Industry Costs of Equity. Journal of Financial Economics (February 1997), 153-193. Financial Accounting Standards Board (FASB). Recognition and Measurement in Financial Statements of Business Enterprises. Statement of Financial Accounting Concepts No. 5. Stamford, CT: FASB, 1984. Frank, M., and S. Rego. Do Managers Use the Valuation Allowance Account to Manage Earnings around Certain Earnings Targets? Journal of the American Taxation Association (Spring 2006), 43-65. Healy, P. The Effect of Bonus Schemes on Accounting Decisions. Journal of Accounting and Economics (April 1985), 85-107. Koh, K., D. Matsumoto, and S. Rajgopal. Meeting or Beating Analyst Expectations in the Post-Scandals World: Changes in Stock Market Rewards and Managerial Actions. Working paper, University of Washington, 2006. Kothari, S., A. Leone, and C. Wasley. Performance Matched Discretionary Accrual Measures. Journal of Accounting & Economics (February 2005), 163-197. Leone, A., and S. Rock. Empirical Tests of Budget Ratcheting and its Effect on Managers Discretionary Accrual Choices. Journal of Accounting & Economics (February 2002), 43-67. Livnat, J. Post-earnings-announcement Drift: The Role of Revenue Surprises and Earnings Persistence. Working paper, New York University, 2004.

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Lopez, T., and L. Rees. The Effect of Beating and Missing Analysts' Forecasts on the Information Content of Unexpected Earnings. Journal of Accounting, Auditing, and Finance 17 (Spring 2002), 155-184. Marquardt, C., and C. Wiedman. How Are Earnings Managed? An Examination of Specific Accruals. Contemporary Accounting Research 21 (Summer 2004), 461-491. Moehrle, S. Do Firms Use Restructuring Charge Reversals to Meet Earnings Targets? The Accounting Review 77 (April 2002), 397-413. Newey, W., and K. West. A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix. Econometrica (May 1987), 703-708. Rountree, B. Mandatory Accounting Changes and Firms Financial Reporting Environments. Working paper, Rice University, 2006. Roychowdhury, S. Earnings Management through Real Activities Manipulation. Journal of Accounting and Economics (December 2006), 335-370. Securities and Exchange Commission (SEC). Revenue Recognition in Financial Statements. Staff Accounting Bulletin No. 101. Washington, D.C.: Government Printing Office, 1999. Stubben, S. Do Firms Use Discretionary Revenues to Meet Revenue and Earnings Targets? Working paper, University of North Carolina, 2007. Zhang, Y. Revenue Recognition Timing and Attributes of Reported Revenue: The Case of Software Industrys Adoption of SOP 91-1. Journal of Accounting and Economics 39 (September 2005), 535-561.

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TABLE 1 Short-Term Deferred Revenue by Fama-French Industry Group

FF Industry N % of Firms Mean Median

Banking Textiles Utilities Shipbuilding, Railroad Equip. Precious Metals Agriculture Aircraft Food Products Steel Works, Etc. Rubber and Plastic Products Fabricated Products Construction Apparel Alcoholic Beverages Shipping Containers Candy and Soda Construction Materials Miscellaneous Automobiles and Trucks Petroleum and Natural Gas Consumer Goods Business Supplies Wholesale Nonmetallic Mining Trading Chemicals Healthcare Real Estate Recreational Products Electrical Equipment Transportation Tobacco Products Insurance Machinery Retail Coal Restaurants, Hotel, Motel Entertainment Medical Equipment Defense Electronic Equipment Personal Services Pharmaceutical Products Telecommunications Measuring and Control Equip Business Services Computers Printing and Publishing

52 4 71 3 18 6 8 29 28 20 7 26 35 11 9 8 52 72 59 158 60 41 148 32 250 86 72 50 38 77 153 9 194 200 310 11 141 159 342 16 668 118 783 627 285 2320 715 156

1.37% 4.17% 5.01% 5.26% 5.39% 6.45% 6.84% 7.06% 7.25% 7.30% 8.05% 8.36% 9.72% 9.73% 10.11% 10.13% 11.21% 12.37% 13.02% 13.45% 13.51% 13.71% 14.04% 14.55% 14.59% 14.73% 15.48% 15.77% 15.97% 18.69% 19.52% 20.00% 20.25% 22.10% 23.27% 23.40% 24.96% 29.01% 33.17% 33.33% 35.65% 37.22% 39.81% 45.11% 45.38% 51.14% 55.56% 66.67%

0.8908% 0.0004% 1.2811% 0.0001% 1.5744% 8.4644% 13.6581% 0.9494% 1.8094% 3.9312% 6.5478% 2.0928% 1.4117% 0.6457% 7.0398% 1.2758% 0.6635% 3.8251% 5.4741% 2.0836% 5.8827% 0.8698% 4.0790% 0.6888% 3.1930% 2.5281% 3.8437% 0.6608% 5.5731% 3.3509% 2.9695% 0.000004% 2.5555% 4.7438% 2.3083% 0.4165% 2.6732% 4.5661% 5.7052% 2.6914% 3.7270% 18.4702% 4.8710% 3.3730% 43.5412% 13.1616% 7.9333% 6.5961%

0.0041% 0.0005% 0.7466% 0.0001% 0.4912% 10.9046% 2.1550% 0.0003% 0.4445% 0.8864% 2.4093% 0.4549% 0.6474% 0.0000% 0.0820% 0.0975% 0.2653% 0.8868% 0.6906% 0.2878% 1.9024% 0.7057% 1.4291% 0.0000% 0.1235% 0.3522% 1.4809% 0.2240% 2.4691% 1.0171% 0.7972% 0.000003% 0.00003% 1.5317% 1.3028% 0.4244% 1.5745% 1.2433% 2.1536% 1.2218% 1.6831% 9.1641% 1.3794% 1.2645% 1.4289% 6.3803% 3.9117% 2.8049%

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This table reports the Fama-French industry name, total number of non-missing and nonzero observations for the ratio of short-term deferred revenue-to-total assets (Compustat Annual Data Item 356 divided by Compustat Annual Data Item 6), percentage of firms in that industry with non-missing and non-zero short-term deferred revenue, as well as the mean and median of the ratio of short-term deferred revenue-to-total assets. I define industries consistent with Fama and French (1997). I multiply ratios by 100 to convert to percentages for expositional purposes.

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TABLE 2 Model Parameters for Normal Change Models Gross A/R t / A t-1= 0 + 1*(1 / A t-1) + 1*(St / A t-1) + 2*(CFOt+1 / A t-1) + t Def Rev t / A t-1= 0 + 1*(1 / A t-1) + 1*(St+1 / A t-1) + 2*(CFOt / A t-1) + t Independent Variables Intercept Expected Sign ? Dependent Variable: Gross A/R t / A t-1 -0.0027** (-2.03) -0.0004 (-0.01) 0.0979*** (14.27) Dependent Variable: Def Rev t / A t-1 0.0025 (1.20) 0.0162 (0.39) N/A

1 / A t-1 St / A t-1 St+1 / A t-1 CFOt / A t-1 CFOt+1 / A t-1 Adjusted R-square

+ N/A + N/A

0.0234*** (4.45) 0.0365* (1.94) N/A

0.0573*** (2.92) 36.6%

29.2%

This table provides parameter estimates for the normal change models of gross accounts receivable and short-term deferred revenue. I require at least eight non-missing observations within an industry-year for estimation. To be consistent with prior literature on earnings management (e.g., Burgstahler and Dichev 1997), I exclude utilities and financial firms (i.e., SIC codes between 4400 and 5000 and SIC codes between 6000 and 6500). I also exclude any firms related to public administration (i.e., SIC codes of 9000 or higher). I winsorize all variables that enter the models at the top and bottom percentiles of their respective distributions. The coefficient estimates are based on means of industry-years and t-statistics are based on the standard error of those means. The coefficient estimates for the abnormal change in gross accounts receivable model is based on 46 industries and 130 industry-years over 2001-2003, and the coefficient estimates for the abnormal change in deferred revenue is based on 22 industries and 39 industry-years over 2001-2003. I also report the associated mean of the adjusted R2s across these industry-years. The dependent variables are Gross A/R t , defined as the change in gross accounts receivable (change in Compustat Annual Data Item 2 plus Compustat Annual Data Item 67), and Def Rev t, defined as the change in short-term deferred revenue (change in Compustat Annual Data Item 356). The independent variables include a constant term, an intercept scaled by lagged total assets, 1/A t-1 (Compustat Annual Data Item 6), change in sales for year t, St (change in Compustat Annual Data Item 12), change in sales in year t+1, St+1, change in cash flow from operations during year t, CFOt (change in Compustat Annual Data Item 308), and change in cash flow from operations during year t+1, CFOt+1. ***, **, and * denote statistical significance at the 1%, 5% and 10% two-tailed levels, respectively.

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TABLE 3 Descriptive Statistics

Panel A: Firms with Accounts Receivable Mean 290.787 0.001 0.000 4.650 0.609 Std. Dev. 3121.742 0.085 0.063 2.522 1.945 25% 3.351 -0.027 -0.023 2.874 0.244 Median 17.693 0.000 -0.001 4.665 0.548 75% 84.603 0.023 0.021 6.394 1.055

Gross A/R (in $ mil) Gross A/Rt AbnormalGross A/Rt Log (MVE)t Book-to-Markett

Panel B: Firms with Deferred Revenue Mean 39.324 0.009 0.000 4.856 0.498 Std. Dev. 284.213 0.053 0.048 2.362 0.956 25% 0.269 -0.003 -0.015 3.283 0.192 Median 2.135 0.001 -0.002 4.958 0.431 75% 11.837 0.014 0.008 6.389 0.814

Deferred Revenue (in $ mil) Def Revt AbnormalDef Revt log (MVE)t Book-to-Markett

This table provides descriptive statistics. All variables are scaled by lagged total assets, except for book-to-market ratio, and log of size. Gross A/R is defined as the change in gross accounts receivable (change in Compustat Annual Data Item 2 plus Compustat Annual Data Item 67). AbnormalGross A/R is the abnormal change in gross accounts receivable defined using the model in the text. Deferred revenue is defined as the change in short-term deferred revenue (change in Compustat Annual Data Item 356). AbnormalDef Rev is the abnormal change in short-term deferred revenue defined using the model developed in the text. Log (MVE) is the natural logarithm of a firms size using beginning of the year market value of equity (Compustat Annual Data Item 25 Compustat Annual Data Item 199). Book-to-market is the beginning of the year book-tomarket ratio ((Compustat Annual Data Item 60 + Compustat Annual Data Item 74) / (Compustat Annual Data Item 25 Compustat Annual Data Item 199)).

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TABLE 4 Abnormal Changes in Gross Accounts Receivable (Deferred Revenue) to Avoid Negative Earnings Surprises AbnormalGross A/Rt (AbnormalDef Revt ) = 0 + 1*PRE-MANAGED_JUSTMISS t + 2*PRE-MANAGED_MEETJUSTBEAT t + 1*SIZEt-1 + 2*BMt-1 + t AbnormalGross A/R 0.0062* (1.82) 0.0017* (1.65) -0.0055*** (-5.62) -0.0003 (-0.71) -0.0028** (-2.56) AbnormalDef Rev -0.0003 (-0.06) -0.0061*** (-4.14) -0.0019 (-1.13) 0.0004 (0.56) -0.0020 (-1.00)

2 1 2

F-test: 1 = 2

N/A

10.68***

This table provides regression results for my first and second hypotheses using the abnormal change in gross accounts receivable and short-term deferred revenue as the measures of revenue management. The primary independent variable is PREMANAGED_JUSTMISS corresponding to the range in which a firm just misses analysts forecasts using a distribution based on pre-managed earnings. PREMANAGED_MEETJUSTBEAT is included as a natural reference group, in which I conduct an F-test between this coefficient and that of the primary variable. The control variables are SIZE, defined as the natural logarithm of a firms size using beginning of the year market value of equity and BM, defined as the beginning of the year book-tomarket ratio. T-statistics are reported in parentheses under the coefficient estimates based on the Newey-West standard error correction for autocorrelation and heteroskedasticity (Newey and West 1987). Coefficient estimates are reported in decimal form. ***, ** and * denote statistical significance at the 1%, 5% and 10% two-tailed levels, respectively (except for F-tests which are based on one-tailed significance levels).

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TABLE 5 Abnormal Changes in Gross Accounts Receivable (Deferred Revenue) to Avoid Negative Earnings Surprises Using a Common Sample AbnormalGross A/Rt (AbnormalDef Revt ) = 0 + 1*PRE-MANAGED_JUSTMISS t + 2*PRE-MANAGED_MEETJUSTBEAT t + 1*SIZEt-1 + 2*BMt-1 + t AbnormalGross A/R -0.0034 (-0.47) 0.0028 (1.33) -0.0025 (-1.16) 0.0006 (0.65) -0.0002 (-0.07) AbnormalDef Rev -0.0028 (-0.48) -0.0052*** (-3.00) -0.0016 (-0.74) 0.0006 (0.87) -0.0019 (-0.78)

2 1 2

F-test: 1 = 2

N/A

5.28**

This table provides regression results for my third hypothesis using a common sample with accounts receivable and short-term deferred revenue. The primary independent variable is PRE-MANAGED_JUSTMISS corresponding to the range in which a firm just misses analysts forecasts using a distribution based on pre-managed earnings. PREMANAGED_MEETJUSTBEAT is included as a natural reference group, in which I conduct an F-test between this coefficient and that of the primary variable. The control variables are SIZE, defined as the natural logarithm of a firms size using beginning of the year market value of equity and BM, defined as the beginning of the year book-tomarket ratio. T-statistics are reported in parentheses under the coefficient estimates based on the Newey-West standard error correction for autocorrelation and heteroskedasticity (Newey and West 1987). Coefficient estimates are reported in decimal form. ***, ** and * denote statistical significance at the 1%, 5% and 10% two-tailed levels, respectively (except for F-tests which are based on one-tailed significance levels).

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TABLE 6 Differential Premium to Using Deferred Revenue or Accounts Receivable to Beat Analysts Forecasts? CAR = 0 + 1*MISS + 2*BEAT + 3*BEAT*A/R + 4*BEAT*D/R + 5*BEAT*BOTH + *UE + t 0 0.013 (1.01) 0.25% 1 -0.001 (-0.06) 2 0.033** (2.14) 3 -0.011 (-0.84) 4 -0.012 (-0.46) 5 -0.023 (-0.57) 0.134* (1.92)

coefficient estimate (t-statistic) Adjusted R2

This table provides regression results for my fourth hypothesis. CAR is the buy-and-hold

abnormal return using the CRSP value-weighted market index measured in a window extending from one day before the earnings announcement date to one day after the release of a firms 10-K to ensure adequate investor access to balance sheet information. MISS is an indicator variable equal to 1 if the firm misses analysts forecasts, BEAT is an indicator variable equal to 1 if the firm beats analysts forecasts, BEAT*A/R is an indicator variable equal to 1 if the firm used accounts receivable to beat analysts forecasts, BEAT*D/R is an indicator variable equal to 1 if the firm used deferred revenue to beat analysts forecasts, BEAT*BOTH is an indicator variable equal to 1 if a firm used both accounts to beat analysts forecasts, and UE is the magnitude of unexpected earnings (I/B/E/S reported earnings less the consensus forecast deflated by stock price at the beginning of the returns period).
***, **, and * denote statistical significance at the 1%, 5% and 10% two-tailed levels, respectively.

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