IDEAS home Printed from https://ideas.repec.org/p/cfi/jseres/cj026.html
   My bibliography  Save this paper

Accounting Policy and the Value Relevance of Earnings --- The Case of Revenue Recognition in the Construction Industry ---

Author

Listed:
  • Takashi Obinata

    (Faculty of Economics, University of Tokyo)

Abstract

It is conceived that the percentage of completion method make periodical earnings smoother than the completed contract method and that it can reflect construction activities of the firm on earnings more timely. Based on this intuition, some people believe that earnings recognized by the percentage of completion method is more value-relevant than that by the completed contract method. Though various measures of value relevance have been adopted in prior studies, this paper adopts the earnings capitalization model and investigates whether the capitalization multiple of earnings by the percentage of completion method is higher than the other. This research focuses on not only the revenue recognition method but also the ratio of revenues recognized by the percentage of completion method. By controlling the differences in firm characteristics, the difference in value relevance between revenue recognition methods is examined by means of cross-sectional comparison. The results show that the capitalization multiple for firms adopting the percentage completion method is not higher than that of the completed contract method. The capitalization multiple for subgroup of lower ratio is significantly lower than other subgroups. Those results are opposed to the common belief that adoption of percentage of completion method improves the usefulness of earnings information. Though unification into the percentage of completion method is took up for discussion in the process of conversion of international accounting standards, empirical results in this paper suggest that the grounds for the unification should be re-examined.

Suggested Citation

  • Takashi Obinata, 2006. "Accounting Policy and the Value Relevance of Earnings --- The Case of Revenue Recognition in the Construction Industry ---," CARF J-Series CARF-J-026, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:jseres:cj026
    as

    Download full text from publisher

    File URL: http://www.carf.e.u-tokyo.ac.jp/pdf/workingpaper/jseries/26.pdf
    Download Restriction: no
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cfi:jseres:cj026. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/catokjp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.