Revenue Surprises Research Articles

Earnings Virality

We examine the determinants and market consequences associated with earnings announcements going viral on social media, a phenomenon we label “earnings virality.” Using a comprehensive panel of historical Twitter data, we find that the typical earnings announcement receives relatively little social media coverage, but others go viral on social media, quickly reaching the feeds of millions of people. We find that viral earnings announcements generally have Twitter content that is more extreme in tone and contains less unique content. Further, earnings virality is positively associated with revenue surprises, investor recognition, retail investor ownership, and retail investor trading around the announcement. Earnings virality appears to be detrimental to markets, as it coincides with lower market liquidity and slower price formation. Overall, our evidence suggests that user-driven dissemination through social media platforms, when amplified and taken to extreme levels, may be harmful to markets.

Momentum and Earnings Information in the Korean Stock Market

AbstractThis study examines whether price momentum profit is related to earnings information in the Korean stock market. Through time‐series and cross‐sectional asset pricing tests, we find that price momentum profits are captured by return on equity; an earnings surprise or revenue surprise partially explains price momentum. The risk‐based factor models cannot explain the existence of earnings‐based momentum, because an earnings‐based zero‐investment portfolio is significantly negatively related to future macroeconomic variables such as gross domestic product and real consumption growth. On the other hand, the underreaction hypothesis is also not sufficient to explain why earnings‐based momentum seems to capture price momentum.

REVENUE SURPRISE AND EQUITY RETURNS IN BORSA ISTANBUL

This paper examines the importance of revenue surprise in the cross-section of stock returns in Borsa Istanbul. Portfolio-level analyses and multivariate cross-sectional regressions document a statistically and economically significant positive relation between revenue surprise and expected returns. Average excess and abnormal return spreads between equities in the highest and lowest revenue surprise deciles are more than 1% per month. The findings of the paper are robust when well-known firm-specific attributes including earnings surprise are controlled for.

Stock performance subsequent to combinations in quarterly revenue surprise, earnings surprise, guidance, valuation, and report time

Finance literature highlights various reasons for stock performance subsequent to earnings announcements. However, other moving parts in these scenarios must also be simultaneously specified. While both revenue and earnings surprises are important for determining stock performance, forward-looking guidance and firm valuation prior to earnings should also be considered. Additionally, analyses that solely consider market-level data miss important subtleties evident in a sector-specific study, as “normal” growth and valuation metrics across sectors widely differ. We differentiate between firms that announce earnings during the evening hours (after the close) and firms that announce earnings during the morning hours (prior to the open).

Stock Performance Subsequent to Combinations in Quarterly Revenue Surprise, Earnings Surprise, Guidance, Valuation, and Report Time

Finance literature highlights various reasons for stock performance subsequent to earnings announcements. However, other moving parts in these scenarios must also be simultaneously specified. While both revenue and earnings surprises are important for determining stock performance, forward-looking guidance and firm valuation prior to earnings should also be considered. Additionally, analyses that solely consider market-level data miss important subtleties evident in a sector-specific study, as “normal” growth and valuation metrics across sectors widely differ. We differentiate between firms that announce earnings during the evening hours (after the close) and firms that announce earnings during the morning hours (prior to the open).

Better Rate Practices Can Avoid Revenue Surprises

Better Rate Practices Can Avoid Revenue Surprises

What do measures of real-time corporate sales say about earnings surprises and post-announcement returns?

We develop real-time proxies of retail corporate sales from multiple sources, including ∼50 million mobile devices. These measures contain information from both the earnings quarter (“within quarter”) and the period between the quarter-end and the earnings announcement date (“post quarter”). Our within-quarter measure is powerful in explaining quarterly sales growth, revenue surprises, and earnings surprises, generating average excess announcement returns of 3.4%. However, our post-quarter measure is related negatively to announcement returns and positively to post-announcement returns. When post-quarter private information is positive, managers, at announcement, provide pessimistic guidance and use negative language. This effect is more pronounced when, post-announcement, management insiders trade. We conclude that managers do not fully disclose their private information and instead bias their disclosures down when in possession of positive private information. The data suggest that they could be motivated in part by subsequent personal stock-trading opportunities.

Managing sales surprise: The role of operational slack and volume flexibility

Investors use sales surprise or revenue surprise (the degree to which actual sales exceed expected sales) as an important component of firm valuation. Rapidly scaling operations in the short-run to meet higher than expected demand, however, could increase adjustment costs and lower efficiency, thereby lowering performance. Operational slack (excess capacity internally in the firm and longer cash-conversion cycles externally in the supply chain) and volume flexibility could help mitigate the negative effect of sales surprise on firm performance. Based on a sample of 1286 firms representing 38,473 firm-quarter observations from 2003 to 2013, and using fixed-effects regression, the proposed relationships, except for mitigating effects of internal operational slack (or, excess capacity measured as standardized industry-adjusted Sales to PPE ratio) are supported for short-term performance (ROA). Findings are robust to long-term firm performance outcomes (Tobin's Q and market-to-book ratio), to controlling for autoregressive effects of past sales surprise, alternate proxies for firm size, squared-term specification for slack, an alternate forecasting method for sales surprise, and controlling for inventory efficiency.

'Trading' Political Favors: Evidence from the Impact of the STOCK Act

This paper demonstrates the tacit benefits that accrue to both politicians and the firms to which they are connected through stock ownership. Specifically, we show strong evidence that politicians use private information and political favors for financial gains from stock investments in their personal portfolios, and that these favors have a real impact on the value and economic outcomes of the firms in which they invest. To do so, we assemble the stock ownership and trading data for all members of the U. S. Congress from 2010 to 2013 and use the passage of the Stop Trading on Congressional Knowledge (STOCK) Act in 2012 as an experiment to examine changes in politicians' trading performance as well as in firm value and outcomes. We find that prior to the STOCK Act, members of the Congress earn significant abnormal returns on their stock trades, and an increase in their holdings of a firm's stock positively predicts the firm's likelihood of being acquired as well as its revenue and earnings surprises. After the passage of the Act, politicians exhibit no such informational advantage in trading or outperformance. On the firms' side, we show that companies with politician ownership on average lose 1.4% in value during the three-day window around the Act's passage, while firms not owned by politicians experience no abnormal returns. Correspondingly, after the Act's passage, these politician-owned firms lose a significant amount of procurement contracts and government grants and become less likely to be selected by the government into high-profile trade missions compared to during the pre-Act period. We find that these mutual benefits are particularly pronounced for politicians who are powerful and firms that are politically active.

Conditional Persistence of Earnings Components and Accounting Anomalies

AbstractWe suggest that the failure of investors to distinguish between an earnings component's autocorrelation coefficient (unconditional persistence) and the marginal contribution of that component's persistence to the persistence of earnings (conditional persistence) provides a partial explanation of post‐earnings‐announcement drift, post‐revenue‐announcement drift, and the accrual anomaly. When the conditional persistence of revenue surprises is high (low) relative to its unconditional persistence, both the post‐earnings‐announcement drift and the post‐revenue‐announcement drift are high (low), because investors’ under‐reaction to revenues and earnings is stronger when the persistence of revenue surprises is more strongly associated with the persistence of earnings surprises. Also, the mispricing of accruals decreases substantially when the conditional persistence of accruals is high relative to its unconditional persistence, because investors’ over‐reaction to accruals is mitigated when the persistence of accruals is indeed more strongly associated with the persistence of earnings. Our findings also suggest that financial analysts’ failure to distinguish between unconditional and conditional persistence of revenues and accruals results in more biased revenue and earnings predictions.

Does revenue momentum drive or ride earnings or price momentum?

This paper examines the profits of revenue, earnings, and price momentum strategies in an attempt to understand investor reactions when facing multiple information of firm performance in various scenarios. We first offer evidence that there is no dominating momentum strategy among the revenue, earnings, and price momentums, suggesting that revenue surprises, earnings surprises, and prior returns each carry some exclusive unpriced information content. We next show that the profits of momentum driven by firm fundamental performance information (revenue or earnings) depend upon the accompanying firm market performance information (price), and vice versa. The robust monotonicity in multivariate momentum returns is consistent with the argument that the market does not only underestimate the individual information but also the joint implications of multiple information on firm performance, particularly when they point in the same direction. A three-way combined momentum strategy may offer monthly return as high as 1.44%. The information conveyed by revenue surprises and earnings surprises combined account for about 19% of price momentum effects, which finding adds to the large literature on tracing the sources of price momentum.

In Search of Fundamentals

We use search volume for firms' products to predict revenue surprises, earnings surprises and earnings announcement returns. We find that increases (decreases) in the search volume index (SVI) of a firm's most popular product strongly predicts positive (negative) revenue surprises. This predictive power is weaker for standardized unexpected earnings (SUE). SVI has strong predictability for returns around earnings announcements, especially among firms with few products, growth firms and firms that manage their reported earnings. Taken together, the evidence suggests that search volume for a firm's products is a value-relevent leading indicator about a firm's future cashflow that the market does not fully incorporate into prices until the earnings announcement.

Price, Earnings, and Revenue Momentum Strategies

This paper examines the profits of revenue, earnings, and price momentum strategies in an attempt to understand investor reactions when facing multiple information of firm performance in various scenarios. We first offer evidence that there is no dominating momentum strategy among the revenue, earnings, and price momentums, suggesting that revenue surprises, earnings surprises, and prior returns each carry some exclusive unpriced information content. We next show that the profits of momentum driven by firm fundamental performance information (revenue or earnings) depend upon the accompanying firm market performance information (price), and vice versa. The robust monotonicity in multivariate momentum returns is consistent with the argument that the market does not only underestimate the individual information but also the joint implications of multiple information on firm performance, particularly when they point in the same direction. A three-way combined momentum strategy may offer monthly return as high as 1.44%. The information conveyed by revenue surprises and earnings surprises combined account for about 19% of price momentum effects, which finding adds to the large literature on tracing the sources of price momentum.

Post earnings announcement drift and the roles of drift-enhanced factors in New Zealand

This study examines the profitability of trading on analyst forecast-based earnings surprises during the post announcement period in the New Zealand stock market over the period 1994 to 2008. The results show that a post earnings announcement drift (PEAD) anomaly exists in the New Zealand equity market. A hedge strategy of going long the top quintile of earnings surprise stocks and short the bottom quintile of earnings surprise stocks can generate more than 6% excess return in the 60 days following the earnings announcement. I further test the association between PEAD and several control variables and find that PEAD is increasing in 1) earnings surprise defined relative to past earnings, and 2) the level of arbitrage risk. Interestingly, I do not find evidence of a positive relation between PEAD and revenue surprise after controlling for earnings surprise as documented in the United States (Jegadeesh and Livnat, 2006). There is also no evidence that the 2002 Disclosure Reform in the New Zealand Stock Exchange reduced the magnitude of PEAD.

On the Market Reaction to Revenue and Earnings Surprises

Abstract: This study extends Ertimur et al. (2003) and Jegadeesh and Livnat (2006a) by providing a contextual framework for the information content of revenue and earnings surprises. I find that the influence of earnings surprises (revenue surprises) on stock returns is lower (higher) in R&D intensive companies. Also, market reaction to earnings surprises is lower in the fourth quarter, and to revenue surprises it is higher in industries with oligopolistic competition. A comprehensive analysis indicates that, in contrast to previous studies for the full sample, in several contexts market reaction to earnings surprises is not higher than to revenue surprises.

Do IPO Earnings and Revenue Surprises Surprise Investors?

In this paper we explore the information conveyed by earnings and revenue surprises for IPO firms. Further, we examine the persistence of earnings and revenue surprises and the characteristics of IPO firms with extreme earnings and revenue surprises. We find a positive relation between announcement returns and both standardized unexpected earnings (SUE) and standardized unexpected revenue (SUR). We also find a positive relation between revenue surprises and one-year holding period returns. Overall, investors appear to pay more attention to the direction than magnitude of earnings and revenue surprises in the short-run but more on the magnitude of revenue surprises in the long-run. Our results suggest that it is hard for IPO firms to continuously surprise investors in terms of earnings and revenues.

U.S. Revenue Surprises: Are Happy Days Here to Stay?

A key question for U.S. policymakers is whether the recent strength in federal revenue is likely to continue. This question is addressed through an econometric analysis of the determinants of tax revenue, using time series that are adjusted for tax policy changes. The results suggest that growth in corporate profits and capital gains each contributed forty percent of the increase in the revenue-to-GDP ratio from 2004-2006, and rising income inequality explains much of the rest. While part of the revenue rise is the result of structural changes taking place in the U.S. economy, some of the recent buoyancy is likely to prove temporary, reflecting the highly cyclical nature of these variables.

U.S. Revenue Surprises: Are Happy Days Here to Stay?

U.S. Revenue Surprises: Are Happy Days Here to Stay?

Post-Earnings-Announcement Drift: The Role of Revenue Surprises

The study reported here consisted of estimating earnings and sales (or revenue) surprises either with historical time-series data or with analyst forecasts. Post-earnings-announcement drift was found to be stronger when the revenue surprise was in the same direction as the earnings surprise. This result proved to be robust to various controls, including the proportions of stock held by institutional investors, arbitrage risk, and turnover (prior 60-month average trading volume). This finding is consistent with prior evidence that earnings surprises have a more persistent effect on future earnings growth when they consist of higher revenue surprises than when they consist of lower expense surprises.

Revenue surprises and stock returns

This paper examines the relation between revenue surprises and contemporaneous and future stock returns. It also investigates whether analysts update their earnings forecasts in response to revenue surprises in a timely and unbiased fashion. Stock price reaction on the earnings announcement date is significantly related to contemporaneous as well as past revenue surprises. After controlling for earnings surprises, we find significant abnormal returns in the post-announcement period for stocks that have large revenue surprises. Although analysts revise their forecasts of future earnings in response to revenue surprises, they are slow to incorporate fully the information in revenue surprises.