Aiming to Beat Expectations: Do Growth Firms Set Revenue Targets above Analyst Forecasts?

Abstract

Despite the increasing popularity of revenue measures, the accounting literature has remained focused on earnings targets. Using a hand-collected dataset on target information of S&P 1500 firms, this study provides the first large-sample examination of revenue targets and documents its difference to earnings targets. I find that revenue targets are in general set above revenue forecasts, whereas earnings targets are in general set below earnings forecasts. This phenomenon is robust to controlling for forecast errors. In addition, I find that growth opportunities increase the extent to which revenue targets are set relative to revenue forecasts, but do not find such effect on earnings targets. I attribute this effect to the incentive to beat revenue forecasts and document heightened effect when the benefits from beating revenue forecasts are larger. My research casts attention on the veiled yet popular revenue targets and documents its distinct characteristics from earnings targets.