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Differential Market Reactions to Revenue and Expense Surprises

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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 growth versus 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.

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Authors and Affiliations

  1. Leonard N. Stern School of Business, New York University, USA

    Yonca Ertimur

  2. Leonard N. Stern School of Business, New York University, 311 Tisch Hall, 40 West 4th Street, New York, NY, 10012

    Joshua Livnat

  3. Laurea Polytechnic, Finland

    Minna Martikainen

Authors
  1. Yonca Ertimur
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  2. Joshua Livnat
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  3. Minna Martikainen
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Ertimur, Y., Livnat, J. & Martikainen, M. Differential Market Reactions to Revenue and Expense Surprises. Review of Accounting Studies 8, 185–211 (2003). https://doi.org/10.1023/A:1024409311267

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