In-Sync or Out-of-Sync? The Joint Information in Revenues and Expenses

41 Pages Posted: 22 Aug 2004 Last revised: 16 Aug 2012

See all articles by Zhaoyang Gu

Zhaoyang Gu

Chinese University of Hong Kong - School of Accountancy

Prem C. Jain

Georgetown University - Department of Accounting and Business Law

Sundaresh Ramnath

University of Miami - Department of Accounting

Date Written: April 1, 2006

Abstract

When revenues are higher or lower than expected, expenses are normally also higher or lower than expected, but by a smaller amount. We hypothesize that when revenue and expense surprises follow this normal revenue-cost structure (i.e., are "in-sync"), the resultant earnings surprises are more persistent. Conversely, when revenue and expense surprise deviate from the normal cost structure (i.e., are "out-of-sync"), earnings surprise are less persistent. Our findings are consistent with this hypothesis. Further, we show that analysts incorporate into their forecast revisions only some, but not all, of the differential persistence between in-sync and out-of sync earnings surprises. The market also only partially incorporates this differential persistence into stock prices, leading to differential post-earnings-announcement-drifts for in-sync and out-of-sync earnings surprises. In comparison with prior research findings, we show that revenue and expense surprises are more informative about future earnings when considered jointly rather than as separate variables. In particular, once we account for the joint information in revenue and expense surprises, the incremental information of revenue surprises per se over earnings surprises documented by prior research is substantially weakened or eliminated.

Keywords: Revenue surprises, expense surprises, earnings persistence, analyst forecasts, post-earnings-announcement-drift

JEL Classification: M41, G14, G29

Suggested Citation

Gu, Zhaoyang and Jain, Prem C. and Ramnath, Sundaresh, In-Sync or Out-of-Sync? The Joint Information in Revenues and Expenses (April 1, 2006). Available at SSRN: https://ssrn.com/abstract=579381 or http://dx.doi.org/10.2139/ssrn.579381

Zhaoyang Gu (Contact Author)

Chinese University of Hong Kong - School of Accountancy ( email )

Shatin, N.T.
Hong Kong

Prem C. Jain

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States
202-687-2260 (Phone)

Sundaresh Ramnath

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States
305-284-6668 (Phone)

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