Revenue Surprises: Growth versus Value Firms

• In Event: Financial Accounting and Reporting 3

Abstract

This study examines whether certain firms’ characteristics, especially growth properties, are associated with the likelihood of achieving the market expectations for revenues. We hypothesize that firms’ growth properties increase incentives to avoid negative revenue surprises because the importance of revenue information in valuation is higher for growth firms relative to non-growth (value) firms. Consistent with our conjecture, results show that growth firms are more likely to meet or exceed analysts’ revenue forecasts than are non-growth firms. In addition, we test the effectiveness of two potential mechanisms for firms to avoid negative revenue surprise news: 1) revenue manipulation, and 2) expectation management. We find that revenue manipulation (expectation management) is a more (less) effective tool for growth firms to meet or beat analysts’ revenue forecasts than it is for non-growth firms. Finally, given the different effectiveness of two available tools for growth firms, we also investigate whether the likelihood of using revenue manipulation (expectation management) to meet or exceed the revenue expectations is associated with a firm’s growth property. Results suggest that growth firms are more (less) inclined to use positive discretionary revenues (downward revenue forecasts) to avoid negative revenue surprises relative to value firms.

Authors

• Dan Palmon, Rutgers, The State University of New Jersey

• Dong Hyun Son, Rutgers, The State University of New Jersey

• Ari Yezegel, Bentley University