The Liquidity, Precision, and Comparability Effects of the Adoption of ASC 606: Revenue from Contracts with Customers

Sunday January 26, 2020

Abstract

I examine the liquidity effect of the adoption of ASC 606: Revenue from contracts with customers. Using a staggered difference-in-differences design, I find that the adoption of ASC 606 increases liquidity. Next, I examine the channels through which the adoption of the standard affects liquidity. Theory suggests that the adoption of standards can affect liquidity through either the precision channel, i.e., the change in the accounting report’s ability to reflect economic events, the comparability channel, i.e., the increase in comparability across reporting entities because of the standardization of accounting standards, or both. I find that the adoption of the new revenue recognition standard is associated with increases in both precision and comparability, which are, in turn, associated with an increase in liquidity. I further show that firms that experience an increase in neither precision nor comparability do not experience an increase in liquidity.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.

Citation

Ferreira, P. H. (2020) The Liquidity, Precision, and Comparability Effects of the Adoption of ASC 606: Revenue from Contracts with Customers. Available at SSRN: https://ssrn.com/abstract=3522765 or http://dx.doi.org/10.2139/ssrn.3522765