How deferred revenue changes impact future financial performance

Abstract

This study examines the potential predictive power of changes in deferred revenues on future profitability based on evidence from the region of the Middle East and North Africa (MENA). It examines whether financial analysts should consider deferred revenues as useful information when evaluating a firm’s future profitability. A pooled OLS regression is used to test the relation. The observations of different companies from various periods are combined into a pooled sample of observations consisting of data from the 500 largest companies in the MENA in terms of market share. Aligned with the existing literature, the findings reveal that changes in deferred revenues are a predictive tool for future financial performance as proven by the positive correlation with the growth of future annual sales, gross profit margin, net profit margin, return on asset, and Tobin’s Q. Testing for this impact adds to the literature given various robustness tests under different circumstances and economic conditions.