The Value Relevance of Revenues Beyond Earnings*
51 Pages Posted: 16 Sep 2004
Date Written: September 15, 2004
This study examines the role of information on revenues in valuing firms. It examines whether revenue has incremental ability to explain stock returns beyond earnings and whether this ability (1) is pervasive or it is limited to situations in which earnings are less informative, (2) has changed over time, and (3) is sensitive to nonlinearity in the relation between returns and earnings. The analysis indicates that revenue information is useful both as a summary measure of a firm's performance for valuation purposes and in conveying new information to the market, after controlling for earnings information. These results are not driven by technology firms, firms incurring losses, or firm-quarters with extreme earnings news, for which earnings information may be less useful, and are robust to model misspecification due to nonlinearity in the returns-earnings relation. Further, while the ability of revenues and earnings to summarize firm performance is stable across time, the new information conveyed by earnings has declined while the ability of revenues to convey new information is undiminished.
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