Are investors inattentive to the information content of advance receipts?

Chenyu Cui, Yuanyu Qu and Hao Gao

China Journal of Accounting Studies, 2024, vol. 12, issue 2, 419-456

Abstract: Advance receipts reflect implicit performance information, as they measure unearned revenue such that cash is received before the revenue can be recognised. This paper examines the information content and related pricing impact of advance receipts. We find that (1) advance receipts are positively related to firms’ future performance after controlling for revenue and earnings growth, (2) advance receipts are associated with positive short-term price impacts but substantially larger subsequent returns, (3) order-flow imbalance during the financial reporting window is unrelated to advance receipts but is strongly and positively related to revenue and earnings growth, (4) a long-short trading strategy constructed on advance receipts generates monthly abnormal returns of 0.5% to 1%, and (5) after the enactment of the new revenue standard, we document a comparable pricing pattern in contract liability. We conclude that investors disregard advance receipts because of habitual thinking, which creates an anomaly in the A-share stock market.

Date: 2024
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DOI: 10.1080/21697213.2023.2300293

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