Valuation Implications of Revenue Forecasts

Abstract

The purpose of this paper is to examine the importance attached to revenue forecasts by firms and the market, and whether these forecasts are value-relevant conditional on earnings forecasts. We address two related questions. First, we examine whether the capital market reaction to earnings (and revenue) announcements bears an association with revenue forecast errors, conditional on earnings forecast errors. Second, we investigate whether there exist differential valuation effects associated with meeting or exceeding analysts' revenue expectations over and above meeting/exceeding analysts' earnings expectations. Our results indicate that revenue forecast errors bear a significantly positive, but a non-linear association with the announcement-period market returns. We also find that this association is stronger for high-growth firms relative to low-growth firms, but does not depend on (i) earnings stability and the extent of consensus among analysts with respect to earnings expectations, and (ii) whether a firm is profitable or not. Finally, our results suggest that for profit firms, the act of meeting revenue forecasts invokes a positive market reaction that is independent of the magnitude of the revenue forecast error.