A catering theory of revenue benchmark beating behavior

This paper tests a revenue catering theory under which 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. I document the time-series variation in the "revenue surprise premium" - a proxy for investor demand for revenue growth, where the "revenue surprise premium" is measured as the earnings announcement period stock return response to good news in revenue after controlling for news in earnings. I investigate whether managers cater to the time-varying "revenue surprise premium" by meeting or beating market expectations of revenue. I find evidence consistent with revenue catering behavior. Firms 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 firms use aggressive revenue recognition practices when catering to investors. The results are most pronounced among firms in high-tech and health sectors whose revenue surprise premiums are higher relative to other sectors.