An advertising barter transaction occurs when two firms exchange rights to place advertisements on each other's media properties (web sites, newspapers, radio stations, etc.). APB 29 establishes fair value as the single basic principle for valuing all nonmonetary transactions, while allowing wide latitude regarding the source of fair value data.
For advertising barter transactions, there is no direct effect on net cash flows and the net earnings effect is zero—revenue is recorded for the advertising space sold, while an equal amount of expense is recorded for the space purchased.5 Thus, measurement is the major issue for these transactions. While "fair value" presumably means cash equivalent value, it was alleged that many Internet firms had either never sold web site ad space for cash or had merely exchanged like amounts of cash with the counterparty (FASB, 2000). According to industry executive estimates, Internet firms recording barter sales had sold only 30% of their ad space (Krantz, 1999). Thus, to the extent that bartered advertising space represents unused capacity that would not otherwise be sold, there was room for abuse.
The perception of excessive leeway in booking advertising barter revenue led to regulatory intervention in the form of EITF 99-17, which governs the accounting for transactions subsequent to January 20, 2000. As indicated below, this new guidance is far more specific than APB 29.
The Task Force reached a consensus that revenue and expense should be recognized at fair value from an advertising barter transaction only if the fair value of the advertising surrendered in the transaction is determinable based on the entity's own historical practice of receiving cash, marketable securities, or other consideration that is readily convertible to a known amount of cash for similar advertising from buyers unrelated to the counterparty in the barter transaction (paragraph 4).
EITF 99-17 further specifies that there must be evidence that a firm commanded similar cash equivalent prices for its advertising services within the prior six months. In this regard, a past cash transaction can support only the recognition of an equal amount of future barter revenue. EITF 99-17 also provides detailed criteria for determining whether advertising surrendered for cash is "similar" to advertising surrendered in a barter transaction.6
While the impact of the regulatory change on the dollar amount of barter revenue recognized is not determinable, it is not essential to our study.7 As the nature of the applicable accounting guidance clearly shifted, the primary issue we examine is whether the shift in recognition criteria resulted in any change in the way investors perceived the credibility of the disclosed information.
While our study is the first to directly examine the valuation of advertising barter revenue, two studies investigate related issues. Davis (2002) examines the pre- versus post-market correction valuation of total revenue reported by Internet firms, using the existence (or non-existence) of barter revenue as a dichotomous variable potentially affecting the valuation of revenue from all sources. With respect to firms reporting barter transactions, she finds evidence of a pre-correction premium assigned to total revenue, while there is no evidence of such a premium in the post-correction period. The present study differs from Davis (2002) in several respects. First, she examines pre- versus post-correction valuation issues to investigate whether the value relevance of barter revenues changed as a consequence of market correction. In contrast, we focus on advertising barter sales recorded under APB 29 versus EITF 99-17. To increase the generalizability of our results, we utilize post-correction stock prices only. Second, the present study utilizes the magnitude of advertising barter revenue to directly test the valuation of barter revenue. Third, our empirical model allows for cross-sectional variation in the pricing of revenue based on differences in growth rates, net profit margin, risk, and other industry segment-related factors. Demers and Lev (2001) examine pre- versus post-correction PS ratios of Internet firms in an effort to identify, on an ex post basis, those firms which would be most affected by the industry shakeout. The present study differs in its post-correction test period and focuses on the impact of a component of total revenue on PS ratios.
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