Events

Ms. Yue CHEN
Ph.D. Candidate in Accounting
Columbia Business School

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 recurring revenue (hereafter recurring firms), investors,adopt valuation methods that prioritize future revenue over current performance, altering the earnings management incentives for these firms. I first document fundamental differences in recurring firms: they tend to be smaller, younger, and have greater revenue persistence, investment efficiency, and profitability. They experience more pronounced stock market reactions to revenue and earnings, but only when future revenue indicators (deferred revenue) are high. To align with growth-focused investor valuation methods, recurring firms avoid premature revenue recognition to maintain a high level of deferred revenue. Instead, they cut discretionary expenses to meet earnings targets and defer revenue to enhance their valuation. These insights underscore the evolving nature of earnings management incentives in response to the changing economy.