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Differential Market Reactions to Revenue and Expense Surprises

Author

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  • Yonca Ertimur

    (New York University)

  • Joshua Livnat

    (New York University)

  • Minna Martikainen

    (Laurea Polytechnic)

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.

Suggested Citation

  • Yonca Ertimur & Joshua Livnat & Minna Martikainen, 2003. "Differential Market Reactions to Revenue and Expense Surprises," Review of Accounting Studies, Springer, vol. 8(2), pages 185-211, June.
    • Handle: RePEc:spr:reaccs:v:8:y:2003:i:2:d:10.1023_a:1024409311267
    DOI: 10.1023/A:1024409311267
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    References listed on IDEAS

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    Cited by:

    1. Kyle Peterson, 2012. "Accounting complexity, misreporting, and the consequences of misreporting," Review of Accounting Studies, Springer, vol. 17(1), pages 72-95, March.
    2. John A. Elliott & Aloke Ghosh & Doocheol Moon, 2010. "Asymmetric valuation of sustained growth by bond- and equity-holders," Review of Accounting Studies, Springer, vol. 15(4), pages 833-878, December.
    3. Eli Amir & Itay Kama & Joshua Livnat, 2011. "Conditional versus unconditional persistence of RNOA components: implications for valuation," Review of Accounting Studies, Springer, vol. 16(2), pages 302-327, June.
    4. Aloke Ghosh & Zhaoyang Gu & Prem C. Jain, 2005. "Sustained Earnings and Revenue Growth, Earnings Quality, and Earnings Response Coefficients," Review of Accounting Studies, Springer, vol. 10(1), pages 33-57, March.
    5. Che‐Chia Chang & Chao‐Chun Chen & Pin‐Yu Huang, 2025. "Informational Content of Warrant Trading Prior to Interim Monthly‐Revenue Report: Evidence From the Taiwan Warrant Market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 45(10), pages 1616-1635, October.
    6. Yonca Ertimur & William J. Mayew & Stephen R. Stubben, 2011. "Analyst reputation and the issuance of disaggregated earnings forecasts to I/B/E/S," Review of Accounting Studies, Springer, vol. 16(1), pages 29-58, March.
    7. Philip G. Berger, 2003. "Discussion of “Differential Market Reactions to Revenue and Expense Surprises”," Review of Accounting Studies, Springer, vol. 8(2), pages 213-220, June.
    8. Anup Srivastava, 2014. "Selling-price estimates in revenue recognition and the usefulness of financial statements," Review of Accounting Studies, Springer, vol. 19(2), pages 661-697, June.

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