Since 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.
This 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.
The 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.
The 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.
This 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.
The authors would like to thank Pauline Weetman and various participants at the 2016 Mid-Atlantic Region Meeting in Morgantown, West Virginia, and at the Financial Reporting and Business Communication 17th Annual Conference in Bristol, UK, for their valuable comments. This work was supported by the American University of Beirut (URB Grant Number 103183).
Okaily, J., Dixon, R. and Salama, A. (2019), "Corporate governance quality and premature revenue recognition: evidence from the UK", International Journal of Managerial Finance, Vol. 15 No. 1, pp. 79-99. https://doi.org/10.1108/IJMF-02-2018-0047Download as .RIS
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