Analyst Revenue Forecasts and Firm Revenue Misstatements

Abstract

Earnings and revenue are ranked as the two most important performance measures reported to outsiders (Graham et al., 2005). However, prior literature primarily focuses on management’s incentives and willingness to manipulate earnings to meet earnings benchmarks. Increasingly, analysts are releasing forecasts of financial items in addition to aggregate earnings, with revenue forecasts being the most common. We posit that management may be under similar pressure to meet revenue forecasts given their impact on firm value. As such, we examine whether analyst revenue forecasts aggravate revenue misstatements. We find that revenue misstatements are positively associated with revenue forecasts and the association is more pronounced when beating revenue forecasts is more important. We also show that several characteristics of revenue forecasts aggravate management pressure and thus the likelihood of revenue misstatements. Further analyses suggest that firms use accruals management rather than real earnings management to inflate reported revenue. Our findings may be useful to academics, investors, and regulators in examining the relationship between analyst revenue forecasts and firms’ financial reporting behavior.

Keywords: Analyst; Revenue forecast; Revenue restatement; Revenue misstatement.

JEL Classification: G10; G24; M41.