Do changes in deferred revenue indicate future financial performance? Evidence from India

Abstract

This study investigates whether changes in deferred revenue is a leading indicator of the future financial performance of Indian firms listed on the S&P Bombay Stock Exchange 500 (S&P BSE 500). Multiple regressions with fixed effects were performed using deferred revenue changes (DRCs) and the future financial performance of firms as independent and dependent variables, respectively, along with control variables. Returns from a portfolio comprising a long position in stocks of the 25% of firms with the highest DRCs and a short position in stocks of the 25% of firms with the fewest DRCs were used to ascertain whether DRCs are mispriced in Indian markets. Results show that DRCs indicate the future financial returns of firms. Investors, however, do not fully incorporate into their firm valuation the information content of DRCs, which creates scope for earning positive abnormal returns in the Indian market from a hedging strategy based on the size of DRCs. To the best of our knowledge, this study is the first to establish a relationship between the size of DRCs and the future financial performance of firms in the Indian setting.