Author

Sofia I. Tent

Date of Award

5-2015

Degree Type

Honors College Thesis

Department

Accounting

First Advisor

Lizzie Turner, Ph.D.

Advisor Department

Accounting

Abstract

This paper examines the Revenue Recognition – Milestone Method (RRMM), FASB codification amendment of 2010 and its effect on the health of firms heavily dependent on the Research and Development (R&D), as evidenced by the operating profit margin. By utilizing a two-stage OLS model developed by Lev and Sougiannis (1996), this study measures the effect of the adoption of the RRMM on operating profit margin. The sample includes U.S. firms with significant R&D expenses (a R&D expenses/Sales ratio greater than 2%) for the years 2006-2013. Due to the more rapid recognition of income using the RRMM, I expect the operating profit margin to be higher for those firms adopting the RRMM. The evidence suggests that firms who adopt RRMM in the Chemical & Pharmaceutical and Electrical & Electronic R&D industries do experience an increase in operating profit margin when compared to firms who do not adopt the RRMM. These results are robust in light of the financial crisis.

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Accounting Commons

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