Using Google Searches of Firm Products to Assess Revenue Quality and Detect Revenue Management

Abstract

This paper presents evidence that Google searches of firm products (SVI) provide information about firm sales and that large discrepancies between reported sales growth and SVI growth can detect upward revenue manipulation. Firms with such large discrepancies—which we call MUP firms—have (a) low-quality revenues measured as sales growth persistence, (b) increases in accounts receivable, (c) lower allowance reserved for bad debts, and (d) higher upward revenue misstatements that are later subject to SEC enforcement actions, consistent with upward revenue manipulation. Investors do not adequately discount for MUP firms’ low revenue quality at the earnings announcement; the negative post-announcement return reaction is consistent with a market correction of the initial overvaluation from the upward revenue manipulation.

Keywords: Google Search, Financial Reporting Quality, Revenue Management and Fraud Detection, Nowcasting using Big Data, Auditing Revenues using Big Data, Market Efficiency

JEL Classification: M41, G14