The Effect of Meeting or Beating Revenue Forecasts on the Association between Quarterly Returns and Earnings Forecast Errors
34 Pages Posted: 2 Feb 2005
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The Effect of Meeting or Beating Revenue Forecasts on the Association between Quarterly Returns and Earnings Forecast Errors
The Effect of Meeting or Beating Revenue Forecasts on the Association between Quarterly Returns and Earnings Forecast Errors
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: Suggested Citation
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