The Number of Sales Digits as a Window into Future Sales Growth
50 Pages Posted: 28 Sep 2022
Date Written: September 21, 2022
Considerable variation exists among firms of similar size reporting in different units of measurement (e.g., dollars, thousands of dollars, millions of dollars). We examine one implication of this choice: the number of sales digits reported in the income statement. Across a battery of univariate and multivariate tests, we provide evidence that firms with fewer sales digits and firms with a decrease in their sales digits reported on the income statement have significantly higher future sales growth. The number of sales digits also predicts sales growth even when controlling for analysts’ expectations of future sales growth. However, in cases where managers issue explicit sales forecasts (only 23 percent of observations), the information in the number of sales digits is subsumed by their disclosures. Finally, we also examine market implications associated with this characteristic and find evidence that investors incorporate the expectations for future growth in current prices, but also find some evidence of mispricing. Overall, these findings suggest that this conventional financial reporting characteristic, the number of sales digits, is a surprisingly useful predictor of future growth.
Keywords: Sales growth, Financial Statements, Number of digits, Unit of Measurement
JEL Classification: G17, M41
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