Analyst Revenue Forecasts and Firm Revenue Misstatements

Posted by tingchih - Oct 20, 2021

In a recent study, published in European Accounting Review, Stephanie Hairston and I, examine whether analyst revenue forecasts induce or deter revenue misstatements.

Increasingly, analysts provide forecasts of financial items in addition to earnings. Of these forecasts, revenue forecasts are the most common type of forecasts issued in addition to earnings forecasts. The prevalence of revenue forecasts reflects the importance of revenue in capital markets, given that revenues are a key driver of firm value, inasmuch as they provide information about a firm’s growth, marketing plans, profit margins, and product differentiation strategies that are not contained in earnings. In fact, earnings and revenue are ranked as the two most important performance measures reported to outsiders. Given that revenue forecasts contain informational value incremental to that contained in earnings forecasts and significantly influence firm valuation, firm managers have incentives to manage revenues and risk a potential misstatement to meet revenue expectations.

Alternatively, revenue forecasts may deter revenue misstatements. When revenue forecasts are issued along with earnings forecasts, the implicit forecasts of profit margin and expense would help investors assess earning quality and increase the cost of revenue management. Therefore, it is also possible that revenue misstatements are less likely when there are more revenue forecasts.

Using a large sample of U.S. listed firms from 2003 to 2018 and controlling for the numbers of cash flow and earnings forecasts, our analysis reveals a significant positive association between revenue forecasts and revenue restatements, which provide strong and direct evidence on revenue misstatements. Our results are robust to a battery of sensitivity tests. Overall, our results suggest that revenue forecasts create incremental incentives to manage revenue.

We further examine several characteristics of revenue forecasts and find that the likelihood of revenue misstatements is higher when there are more revenue forecast revisions, when analysts revise revenue forecasts more frequently than earnings forecasts, and when analysts issue difficult-to-meet revenue forecasts in their first issuance. Further analyses suggest that the association between revenue forecasts and revenue misstatements is more evident when firms are larger, when investor revenue expectations are higher, and when revenue forecasts are more prevalent in an industry. Lastly, we examine how firms manage reported revenue, and the results suggest that firms use accruals management rather than real activities manipulation to manage reported revenue.

Through a comprehensive investigation of analyst revenue forecasts, we add to the literature on analysts’ disaggregated forecasts and earnings management. Our findings should be of interest to researchers, investors, and regulators who express concerns about the impact of forecasts on earnings fixation (the reliance on earnings for decision-making) and the negative impact of earnings management on shareholder wealth. Overall, our findings suggest that analysts play an important role in shaping account-specific financial reporting behaviors.

Discover more about our study at

To cite this article: Ting-Chiao Huang & Stephanie Hairston (2021): Analyst Revenue Forecasts and Firm Revenue Misstatements, European Accounting Review.