A catering theory of revenue benchmark beating behavior
This paper relies on the theoretical model in Aghion and Stein (2008) to develop an empirical test of the revenue catering theory. Aghion and Stein (2008) propose that investors have time-varying demand for revenue growth and managers will cater to this demand by delivering higher revenue when investors place a higher premium on revenue. Using the “revenue surprise premium” the earnings announcement period stock return response to good news in revenue after controlling for news in earnings – as a proxy of investor demand for revenue growth, I investigate whether managers cater to investor demand for revenue growth by meeting or beating market expectations of revenue. I find evidence consistent with Aghion and Stein’s (2008) catering theory for firms in the high-tech and health sectors. Firms in these sectors are more likely to meet or beat analyst forecasts of revenue when the previous quarter’s revenue surprise premium is high. I also find evidence that these firms use aggressive revenue recognition practices when catering to investors. JEL Classification: M41, M49, G10