Mandatory revenue disaggregation and voluntary management sales forecasts : evidence from ASC 606

Abstract

In 2018, US firms adopted a new revenue recognition standard, ASC 606, Revenue from Contracts with Customers, which alters revenue recognition and mandates new and more granular revenue disaggregation. This paper examines whether a mandated change in the quantity of revenue information, which is driven by the adoption of ASC 606, leads to a change in management’s voluntary disclosure of revenue information. Specifically, we examine whether managers are more likely to provide revenue forecasts following ASC 606. On the one hand, the greater detail provided by ASC 606 may enrich the information environment, reducing the need for voluntary disclosure. On the other hand, the complexity and additional disclosures of ASC 606 may lead to divergent investor opinions, increasing the need for guidance from management. Our main findings suggest that firms that disaggregate their revenue following the adoption of ASC 606 are more likely to provide management sales forecasts. We further find that the effect is stronger for firms whose revenue attracts more investor attention and for firms with high regulatory scrutiny, a poor information quality, and weaker for firms with high proprietary cost concerns. Overall, this study provides novel insights into the interplay between mandatory and voluntary disclosure.