The Role of Revenue in Firm Valuation

This study examines the role of revenue in valuing firms beyond earnings and investigates whether this (1) is pervasive or limited to certain situations in which earnings may be less informative, (2) is sensitive to nonlinearity in the relation between returns and earnings, and (3) has changed over time. Our analysis indicates that revenue is useful both as a summary measure for valuation purposes and in conveying new information to the market, after controlling for earnings information. These results are not driven by technology firms, extreme earnings news or loss situations, or by model misspecification because of nonlinearities. The role of revenue in firm valuation is greater, and the role of earnings is smaller, in extreme earnings situations. We also find that revenue is more useful in summarizing the performance of technology firms and for profit observations. While the combined ability of revenue and earnings to summarize contemporaneous value-relevant information has remained stable over time, the new information conveyed by earnings has declined whereas the ability of revenue to incrementally convey new information has not diminished. [PUBLICATION ABSTRACT]