The Alignment between Stewardship and Valuation Roles of Revenues

ABSTRACT: In this study, we examine the alignment between the stewardship and the valuation functions of revenues in financial statements. We identify two settings in which revenue conveys value relevant information to investors and also plays a significant role in the executive compensation: when expenses are poorly matched with current revenues and when firm size is the key determinant of survival and profitability. Firms that display these characteristics increase over time with the arrival of newer cohorts of listed firms. We contribute to compensation literature by showing that managers are increasingly incentivized to achieve topline growth instead of earning profits. We contribute to financial accounting literature by demonstrating a high degree of symmetry between the stewardship and the value relevance roles of revenues, similar to that for earnings.