Voluntary Disclosure of the Components of Revenue Growth

Abstract

In this study we examine the valuation implications for different sources of growth. Specifically, we investigate whether supplemental information provided by firms to assist financial statement users in understanding the sources of growth is reflected in a premium to those firms. We examine a unique sample of firms that voluntarily choose to provide detail about their levels of organic revenue growth. Results indicate that firms that are larger, with lower research and development expenditures, and with higher intangible assets are those more likely to provide detailed disclosures about revenue growth components, all characteristics consistent with incentives to provide additional transparency regarding revenue growth. In regressions of returns on earnings disaggregated into revenue growth and costs, we find evidence that there is indeed a valuation premium to organic growth relative to non-organic growth. These findings are consistent with investors viewing the organic growth component of revenues as more persistent than the non-organic component of growth. Consistent with this interpretation, we document significant persistence of organic revenue across periods and a notable lack of such persistence for non-organic revenue growth.

Keywords: revenue growth, organic growth, earnings response coefficients, disclosure incentives

JEL Classification: D8, K2, M4, G1