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

Okaily, Jihad Al, Dixon, Rob and Salama, Aly (2019) Corporate governance quality and premature revenue recognition: evidence from the UK. International Journal of Managerial Finance, 15 (1). pp. 79-99. ISSN 1743-9132

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Official URL: https://doi.org/10.1108/IJMF-02-2018-0047

Abstract

Purpose
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.

Design/methodology/approach
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.

Findings
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.

Research limitations/implications
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.

Originality/value
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.

Item Type: Article
Uncontrolled Keywords: Corporate governance, Discretionary revenues, Earnings management, Premature revenue recognition, UK-listed companies
Subjects: N300 Finance
N400 Accounting
Department: Faculties > Business and Law > Newcastle Business School
Depositing User: Elena Carlaw
Date Deposited: 23 Jul 2020 15:59
Last Modified: 23 Jul 2020 16:00
URI: http://nrl.northumbria.ac.uk/id/eprint/43866

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