Top Line and Bottom Line Forecasts: A Comparison of Internet Firms During and after the Bubble

Analysts' forecasts of revenue and how they compare to reported revenues is now a standard part of financial analysis surrounding earnings releases for internet firms. In this paper, we examine the characteristics and relative information content of revenue and earnings news for such firms during and after the internet bubble. First Call analysts tend to be pessimistic in their forecasts of both revenues and earnings for internet firms. However, after the crash, the quality of revenue forecasts improves: the bias declines and they become significantly more accurate. This improvement is predominantly driven by forecasts made for firms reporting losses. For these firms, we find that stock prices respond to revenue, but not earnings, surprises both during and after the bubble. In contrast, for firms reporting profits, stock prices respond to earnings surprises both during and after the bubble but to revenue surprises only during the bubble - and then only weakly. Thus, analysts appear to have improved revenue forecasts for those firms for which top line surprises are most relevant to the market