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http://dx.doi.org/10.5345/JKIBC.2016.16.5.463

Reliability of Revenue Recognition by Percentage of Completion Method in Construction Industry - Empirical Analysis from Information Perspective  

Park, Hong-Jo (College of Economics & Business, Daegu University)
Ji, Hyun-Mi (College of Business Administration, Keimyung University)
Publication Information
Journal of the Korea Institute of Building Construction / v.16, no.5, 2016 , pp. 463-470 More about this Journal
Abstract
Construction companies calculate their revenues and costs from constructing activities using the 'Percentage of Completion Method', which is based on ratio of actual construction cost to total costs estimated. The reliability of the net profit of construction companies is being evaluated lower than other industries due to incorrect application of 'Percentage of Completion Method' to cover losses actually occurred. Therefore, the purpose of this study is to verify the quality of earnings calculated based on 'Percentage of Completion Method' in terms of information usefulness. Results from empirical analysis show that investors in stock market underestimate the value of the construction companies' earning information by applying 'Percentage of Completion Method' and not actively use in investment decision making. Accordingly, it has been confirmed that the association between income information and stock prices falling. These results suggest the need for strict supervision of the supervisory authorities and the practical application of 'Percentage of Completion Method' in reliability.
Keywords
construction industry; Percentage of Completion Method(PCM); revenue recognition; information quality;
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