The Effect of Meeting or Beating Revenue Forecasts on the Association between Quarterly Returns and Earnings Forecast Errors

34 Pages Posted: 2 Feb 2005

See all articles by Lynn L. Rees

Lynn L. Rees

Utah State University - School of Accountancy; Utah State University - Huntsman School of Business

Shiva Sivaramakrishnan

Rice University

Multiple version iconThere are 2 versions of this paper

Date Written: August 2004

Abstract

Recent studies in the accounting literature provide evidence of a market premium whenever firms meet or exceed analysts' earnings forecasts. Financial analysts typically issue revenue forecasts in addition to earnings forecasts. In this study, we draw our motivation from the cue consistency theory to examine whether meeting or exceeding revenue forecasts serves as an additional cue to the market in pricing earnings performance. Consistent with this theory, we show that the market premium (penalty) to meeting or beating (not meeting) earnings forecasts is accentuated when revenue forecasts are also met (not met). Meeting earnings forecasts but not meeting revenue forecasts generally results in a significantly negative market penalty, and the magnitude of the earnings response coefficient jointly depends on whether the earnings and revenue forecasts are met or not. Finally, consistent with previous research, we document a significant association between revenue forecast errors and quarterly abnormal returns. However, we show that after allowing for differential market reactions depending on whether earnings and revenue forecasts are met, this association becomes insignificant. This result suggests that the value of meeting revenue forecasts is arguably of greater importance to market participants than the magnitude of the revenue forecast error.

Keywords: Revenue forecasts, earnings forecasts, financial analysts, valuation, meet or beat, expectations

JEL Classification: M41, G12, G14, G29

Suggested Citation

Rees, Lynn L. and Sivaramakrishnan, Shiva, The Effect of Meeting or Beating Revenue Forecasts on the Association between Quarterly Returns and Earnings Forecast Errors (August 2004). Available at SSRN: https://ssrn.com/abstract=655421 or http://dx.doi.org/10.2139/ssrn.655421

Lynn L. Rees (Contact Author)

Utah State University - School of Accountancy ( email )

College of Business
Logan, UT 84322-3540
United States

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States
435-797-2272 (Phone)

Shiva Sivaramakrishnan

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

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