Review of Accounting Studies, 8, 185–211, 2003
# 2003 Kluwer Academic Publishers. Manufactured in The Netherlands.
Differential Market Reactions to Revenue and
New York University, Leonard N. Stern School of Business
JOSHUA LIVNAT* email@example.com
New York University, Leonard N. Stern School of Business, 311 Tisch Hall, 40West 4th Street, New York,
Laurea Polytechnic, Finland
Abstract. This study investigates investors’ reactions to revenue and expense surprises around preliminary
earnings announcements. Results show that investors value more highly a dollar of revenue surprise than a
dollar of expense surprise. Results further show that these differential market reactions to revenue and
expense surprises vary systematically for growthversus value ﬁrms and depend on (a) the proportion of
variable to total costs, (b) the relative persistence of sales and expenses, and (c) the proportion of operating
to total expenses. Results highlight the importance of interpreting the earnings surprise in the context of its
sources—e.g. surprise in revenues or in total expenses.
Keywords: revenue forecasts, sales and expense surprises, value-growth, earnings management
JEL Classiﬁcation: G14, M41
A wide body of researchdocuments a positive association between unexpected
earnings and market reactions around the preliminary announcements of earnings
(see Lev, 1989; Kothari, 2001 for reviews of prior studies). However, substantially
less research has been directed to the problem of assessing whether investors react
differently to a dollar surprise in revenues than to a dollar surprise in expenses, and
whether value and growth companies experience differential reactions to the sales
and expense surprises.
Since ﬁrms announce bothrevenues and earnings in the
preliminary earnings announcement, investors can use the disclosure of revenues to
better assess and interpret the quality of the disclosed earnings signal.
of this study is to shed light on the differential market reactions to revenue and
expense surprises in various contexts.
Most valuation models suggest that investors react more strongly to any surprise
that is more persistent or less noisy. To the extent that the revenue surprise is more
persistent and/or less noisy than the expense reduction surprise, investors are expected
to react more strongly to the revenue surprise than to the expense surprise. We provide
below evidence that the revenue surprise is more persistent, and surmise that the