Analysts’ revenue forecasts and discretionary revenues

Abstract

We investigate the association between analysts’ revenue forecast coverage and firms’ revenue manipulation. We find that coverage of revenues by financial analysts relative to earnings is positively associated with the magnitude of firms’ discretionary revenues. This finding shows a pressure effect of analysts, where analysts’ revenue forecasts induce incentives for managers to manipulate revenues to meet expectations. Our cross-sectional analyses show that this pressure on discretionary revenues is higher during the fourth fiscal quarter. This effect is also more pronounced for firms whose revenues are more value-relevant and when analysts exhibit greater disagreement over revenue forecasts. Further evidence related to ASC 606, a major GAAP change about revenue accounting, provides corroborating evidence for the pressure effect. Robustness checks confirm the validity of our findings and offer further insights into the role of revenue forecasts in revenue manipulation.