Revenue Growth and Stock Returns

Abstract

This paper examines the relation between revenue surprises and future stock returns. It also investigates how analysts update their earnings forecasts following announcements of revenue and earnings surprises. The results indicate that the stock price reaction on the earnings announcement date is significantly related to both revenue surprises and earnings surprises. I also find significant abnormal returns in the post announcement period for stocks that have large revenue surprises, after controlling for earnings surprises. Although analysts revise their forecasts of future earnings in response to revenue and earnings surprises, they are slow to incorporate all the information in their forecast revisions. In particular analysts underestimate the extent to which revenue and earnings surprises have permanent effects on future earnings.

Keywords: Revenue growth, revenue surprises, earnings growth, Standardized unexpected earnings, Standardized unexpected revenue growth, post-announcement drift, market efficiency

JEL Classification: G12, G14