Analysts’ Revenue Forecasts and Discretionary Revenues

Abstract

We investigate the disciplining role of analysts’ revenue forecasts on firms’ discretionary revenues. We analyze quarterly data and find evidence that initiation of analysts’ revenue forecasts reported in IBES is associated with a decrease in the magnitude of discretionary revenues. Our results are robust to alternative definitions of discretionary revenues. The evidence is consistent with the role of financial analysts in corporate governance. Further analyses show that accounts receivable is the primary accrual component that is affected by analysts’ revenue forecasts and that firms receiving more analysts’ revenue forecasts report a lower level of discretionary revenues. We use a placebo test with analysts’ cash flow forecasts to indicate that the change of discretionary revenues is a response specifically to revenue forecasts. We also provide additional tests that address endogeneity concerns.

Keywords: Analysts’ Revenue Forecasts, Revenues, Accrual Management, Discretionary Revenues

JEL Classification: G29, M41