Research

The subscription economy — wherein firms offer products and services for recurring fees — has witnessed substantial growth in the last two decades. When valuing firms that rely on subscription revenue (hereafter subscription firms), investors adopt valuation methods that prioritize future revenue over current performance, which in turn alters the incentives and form of earnings management by these firms. Subscription firms tend to be relatively small and young, and they display heightened revenue persistence, improved investment efficiency, and greater profitability. They also experience more pronounced stock market reactions to their revenue and earnings, as evidenced by elevated multiples and earnings response coefficients (ERCs). However, the ERCs of subscription firms decrease when indicators of future revenue (e.g., deferred revenue) are low. Consistent with the valuation approaches used by investors, subscription firms avoid premature revenue recognition, as recognizing revenue prematurely compromises indicators of future revenue. Instead, they are more likely to cut discretionary expenses to meet earnings targets and defer more revenue to enhance valuation. These insights underscore the evolving nature of earnings management incentives in response to the changing economy and advocate for a prudent application of prior findings in this dynamic context.

Presented at: Columbia Business School BrownBag (2023), Accounting Design Project (scheduled 2023)

Committee Members: Wei Cai, Doron Nissim (Co-Chair), Shiva Rajgopal (Co-Chair), Ayung Tseng

Draft available upon request

Revise and resubmit at Review of Accounting Studies; invited presentation at 2023 Review of Accounting Studies Conference

From 2008 to 2020, 180 firms out of S&P 1500 have disclosed employee diversity targets. We conduct the first comprehensive analysis of firms’ employee diversity targets and ask three research questions: (i) which firms tend to announce diversity targets? (ii) do firms deliver on their diversity targets? (iii) what are the potential implications associated with disclosure of such targets for employee hiring and investors? We find that firms with a greater willingness (proxied by past ESG penalties, a higher CEO-to median-employee pay ratio, and after #Metoo and BLM movements) and ability (proxied by financial strength and gender and ethnic minorities on boards) to improve employee diversity are more likely to disclose diversity targets. Exploiting the Revelio dataset, of 15,639 firm-years for 1,203 distinct firms from 2008 to 2020, we observe that firms that disclosed a diversity target have indeed hired more diverse employees, but such diversity levels have already increased substantially prior to the target disclosure. Firms with numerical, forward-looking, and rank-and-file employee-targeted goals are associated with greater employee diversity relative to firms that announce other types of goals. Moreover, improved diversity performance does not seem to occur at the cost of employee quality, as measured by the Revelio dataset. Overall, our results have practical implications for how investors and stakeholders might want to interpret corporate diversity targets.

Presented at: 2023 Hawaii Accounting Research Conference (Chen), 2022 AAA Joint Meeting of Diversity and TLC Section (Chen), Columbia University (Yang)

Media coverage: CBS Newsroom

ASC 606 significantly transformed the landscape of revenue recognition and the disclosure of information related to contracts with customers, prompting recent studies to investigate its impact on reporting quality. This study examines the effect of ASC 606 on voluntary disclosure. By analyzing management forecasts surrounding the adoption of ASC 606 using a Difference-in-Differences (DID) design, we observe a substantial reduction in the frequency of management forecasts among firms materially affected by the standard. This decline is primarily driven by forecasts related to top-line items, such as revenue, rather than those concerning bottom-line items, indicating that the decrease can be attributed to the adoption of ASC 606. Notably, the decline in management forecasts is particularly pronounced for range forecasts, suggesting that expanded mandatory disclosure is displacing lower-quality voluntary disclosure. Moreover, the reduction is concentrated in good news forecasts, consistent with the idea that firms are less willing to reduce negative forecasts due to litigation risks. Diagnostic tests indicate that the reduction in voluntary disclosure induced by ASC 606 is most likely a result of the standard's expansion of mandatory disclosure regarding revenue activities and related transactions (the substitution effect). Our study sheds light on an unexplored impact of ASC 606 and has implications for principles-based accounting standards.

Draft available soon