Using Google Searches of Firm Products to Nowcast Sales Revenues and

Detect Earnings Management

Peng Chia Chiu, Chinese University of Hong Kong

Xuan Huang, California State University, Long Beach
Siew Hong Teoh, University of California, Irvine
Yinglei Zhang, Chinese University of Hong Kong

August 24, 2015

Preliminary and Incomplete

Please do not circulate

For Singapore Management University

School of Accountancy Brownbag Use Only
 Using Google Searches of Firm Products to Nowcast Sales Revenues and
Detect Earnings Management

Abstract

Nowcasting of sales revenues refers to forecasting current quarter sales in real time before the
information is officially reported in financial statements. We explore how demand for a firm’s
products is captured by Google searches of the products, and how this information can be used
by firm stakeholders to nowcast sales revenues and as a new earnings management detection tool.
We examine whether Google searchs can be useful for assessing the veracity of reported sales
revenues and associated balance sheet items, such as accounts receivables and deferred revenues.

In our 2004-2013 sample, we confirm previous finding that a log change in Google search
volume (∆SVI) strongly nowcasts the concurrent quarter change in sales. We find that such
predictability is mainly evident in end-user industries such as retail and non-durable goods
industries. To examine whether Google search is useful for detecting earnings management, each
quarter we sort firms independently into tercile groups by the magnitude of ∆SVI and change in
sales. We regard firms that are in both the lowest tercile ∆SVI and the highest tercile change in
sales as MUP (manipulators up), a group that is most likely to have manipulated revenues
upwards.

We find that MUP firms are more likely subject to upward earnings management incentives and
have managed earnings. MUP firms report a higher change in accrued revenues, total accruals,
abnormal production (a measure of real earnings management) and lower cash flows from
operation, after controlling for the change in sales and other earnings management determinants.
These effects are stronger in firms with lower accrual quality. MUP firms are also more likely to
meet/beat earnings thresholds, conduct M&A activities, raise external financing using debt or
equity, and engage in net insider selling. Finally, we find that MUP firms are associated with a
higher likelihood of subsequent revenue restatements.

In summary, we provide new evidence about how Google searches of company products are
useful for nowcasting sales revenues ahead of financial statement reporting in end-user industries,
and how that it can serve as a method for external parties to audit firm reported revenues and
balance sheet account values, and to detect earnings management almost instantaneously.

1
Introduction

Literature Review and hypothesis development

Data Sources and Variable Measurements

We obtain quarterly sales revenues and other financial statement items as control

variables from Compustat and CRSP. The measure of key interest in our paper is based on

Google Trends’ search volume index (SVI) for web queries of the product names or brands of

companies in our sample. We explain below how we obtain SVI and the list of product names

and brands of companies in our sample.

Google Trends

Google has dominated web search engines for over a decade (see Figure 1). (Indeed, the

European Union filed a formal antitrust complaint against the company; Wall Street Journal,

April 15, 2015.) The Google Trends website at the URL http://www.google/trends publishes a

search volume index, SVI, which is a measure of relative popularity of the search term. SVI is

available since January 1, 20041 and allows web queries over a specified time interval. SVI is

available also for searches by geographical region at the county or metro areas within the U.S.

and for some countries.

SVI is a relative popularity measure; search volume is scaled by a normalized maximum

query for the same search term over the specified time period. It does not provide raw search

volume. We use weekly intervals for the SVI measure. Our sample time period covers the first

1
Google provided SVI at both Google Insights and Google Trends previously, but currently only at Google Trends.

2
week in January 2004 to the last week in March 2014. Google Trends also normalizes the

maximum search volume query for a given term to 100. The weekly SVI for a search term on our

products list is the search volume that week for that product scaled by the normalized maximum

search volume in any week in the Jan 2004 to March 2014.2 Since we examine changes in SVI,

how Google scales results is irrelevant. We download weekly SVIs for a product name or brand

of a company in our sample.

Brands/Products

Consumers likely do a web query using the specific product name or brand when they are

contemplating making a purchase of the product. There is currently no electronic database that

contains a comprehensive list of all product names and brands of companies. We obtain an initial

list of firms and their products from Nielsen Media Research (NMR), which is similar to the

procedure of Da, Engelberg, and Gao (2012). NMR tracks product-level television advertising by

firms and the list we obtained from them consists of firm names, product or brand name that was

2
For example, consider search term coke zero for week of Jan 6, 2013. Suppose that the volume of
search is 20. The maximum search volume for coke zero from Jan 2004 to March 2014 is 50. To
normalize the scalar to 100, the maximum search is doubled. So SVI for coke zero for Jan 6 2013 is 40%.

3
advertised on television and the associated advertising expenses during the sample period 2004

to 2013.

From this initial list, we eliminate all firms that are not on the COMPUSTAT database. 3

To ensure that searching and downloading SVI from Google Trends is manageable, we select for

each firm in a quarter only one product name or brand that commanded the largest advertising

expense. We used the product name or brand to obtain the search volume SVI for that firm in

that quarter.

To identify the most likely search term a potential consumer would use to Google the

product, we asked at least three student research assistants how they would search for each

product/brand as a consumer. If they report differences in search terms, we enter all their

suggestions into Google Trends as a related search, and Google Trends will return the product

name with the top related search volume. 4 We enter the identified top product name likely used

by consumers to search for the product into Google Trends and download the weekly SVI for

each product.

We aggregate weekly SVIs in each fiscal quarter. For each firm in each quarter, we

calculate the key measure of interest in this paper, SVI, as the difference between log SVI of

current quarter and log SVI of previous quarter. We require firms to have historical financial data

from COMPUSTAT, stock returns from CRSP, and restatement data from Auditor Analytics.

The final sample includes 17,549 firm-quarter observations covering the period from 2004 to

2013.

Revenue Management Indicator

3
Unmatched firms likely are private firms or non-profit organizations.
4
The “related searches” feature helps us to determine which query is used most often.

4
 For each firm in each quarter, we define revenue surprise as the percentage growth in

sales for the quarter Sales, calculated as the increase in firm sales from the previous quarter to

the current quarter scaled by previous quarter sales.5 Our main variable of interest is the revenue

management indicator, MUP, which we identify from the inconsistency between the percentage

change in search volume of a firm’s key product and the percentage revenue growth. Specifically,

for each quarter, we independently sort all firms into three terciles based on the magnitude of

SVI and separately three terciles on the magnitude of Sales.6 Firms in the bottom SVI tercile

rank but highest Sales tercile rank is considered a likely manipulator upwards of revenues MUP.

Our tests relate MUP to indicators of earnings management and earnings management

incentives. Following past literature, we identify settings where the firm likely has managed

revenues using indicator variables for the following situations: when the firm meets or beats past

quarter’s earnings by a small margin, MBE; when the firm undertakes mergers and acquisitions,

M&A; when the firm raises external capital by issuing new debt or equity, Issue; and when

insiders are net sellers of the firm’s stocks within the short open period immediately after the

earnings announcement, InsideSell (see Jeng 1998, Bettis et al. 2000, and Roulstone 2003). The

detailed definitions and computations of these variables are in the Appendix Table.

We use revenue restatements as an ex post measure of revenue management, and obtain

restatements data from Audit Analytics. We examine the effects on potential revenue

management on changes in financial statement accounts including the change in accounts

receivables ACCREV, change in deferred revenues DEFREV, and cash flow from operations,

all variables scaled by beginning quarter total assets. Firms can also manage revenues using real

5
Our results are all qualitatively similar if revenue surprise is the standardized quarterly sales growth, as in Da et al.
(2012), and calculated as the change in firm quarterly sales divided by the standard deviation of sales over the last
eight quarters.
6
Results are qualitatively similar if MUP is based on quartile ranks of SVI and revenue surprise.

5
activities, so we measure real earnings management using Roychowdhury’s (2006) abnormal

production cost measure, AB_PROD. Finally, we also measure the firm’s lagged accrual quality

AQ following Dechow and Dichev (2002). All variable definitions are in the Appendix Table.

Summary Statistics

Table 1 provides summary statistics for the main variables in our sample. Panel A presents

the mean, median, standard deviation, the first and the third quartile statistics for the main

variables, and Panel B reports the Pearson pairwise correlation between the variables. *****

check whether total assets, size, mtb, roa, typical of top 1500 or 2500 firms in compustat ****

The typical firm has a 1.6% change in quarterly search volume, SVI, with the median firm

experiencing very little change in searches. At either quartiles, there is about a 10% decline or 10%

increase in search volume, and the standard deviation is about 30%. Most relevantly, the

univariate tests summarized in Panel B indicate that change in search volume SVI is

significantly positively correlated with revenue surprises, consistent with the ability of search

volume of a firm’s products nowcasting revenues in the quarter.

Put Table 1 here

Predictive Power of Google Search for Sales Revenues

We first evaluate whether search volume based measure contains information useful to

nowcast revenues, as reported by Da, Engelberg and Gao (2012), They find that changes in SVI

predict current revenue surprise, consistent with SVI containing useful information to nowcast

6
revenues.7 We examine whether their results extend to our sample and sample period, and go

further to explore how the ability of search volume to nowcast revenues depends on industry.

The basic regression model is:

Sales jt = β0+ β1 SVI jt + β2 SIZEjt + β3 BTMjt + β4 Leverage jt + other controls + ε jt . (1)

In addition to controlling for quarter fixed effects, we present t-statistics clustered by firm and

quarter to correct for potential cross-sectional and time-series dependence of errors in all the

relevant tests throughout the paper (Peterson 2009; Gow et al. 2010).

The first column of Table 2 presents the results of the basic regression (1). The other two

columns of numbers are results for regressions that add one quarter-lag and four-quarter lag

change in sales as further controls. All three regressions show that SVI has strong ability to

nowcast current quarter sales revenue surprises. In the first regression, controlling for size,

market-to-book ratio, and leverage, the coefficient for SVI is 0.72 with a highly significant t-

statistic of 8.45. The coefficient of 0.919 is comparable to that reported by Da et al. (2012) for

their earlier time period. Economically, a one standard deviation increase in SVI leads to an

increase in standardized unexpected revenues per share of $209 (0.72*0.29), which is about

18.5% ([0.72*0.29] /1.127) of a one-standard deviation change in revenue surprise (1.127).

Since revenue surprises are autocorrelated, in Table 2 Column 2 we add one-quarter

lagged revenue surprise Sale1 as an additional control. The coefficient and statistical

significance for SVI is very similar, so the predictive power of search volume change for

revenue surprises is robust. The adjusted R-square of the regression increases from 7% to 15%,

which is in the same ballpark as in Da et al. (2012). The coefficient of lagged revenue surprise is

7
SVI for a fiscal period is instantaneously available at the end of the fiscal period, in contrast to financial
information which are released only after a lag after the fiscal period end of up to 30 days for quarterly reports and
45 days for annual reports Therefore, SVI is helpful for nowcasting sales revenues, which is forecasting the present
quarter sales revenues before they are released in the financial statements.

7
negatively significant (-0.28, t = -13.98), suggesting that the quarterly revenue surprise is mean

reverting.

To allow for potential seasonality in revenues for some firms, we further include a four-

quarter lagged quarterly sales Sale4 in Column 3 results. Again, the results show that the

predictability of SVI for revenue surprises remains a robust result. While the coefficient for

SVI is halved (0.33), it remains positive and statistically significant (t = 7.91). The coefficient

on revenue surprise four quarters ago (Sale4) is positive and significant (t = 25.39) suggesting

that generally there is growth in seasonal quarter earnings for the average firm in the sample

period. Overall, our evidence indicates that the findings of Da et al. (2012) that SVI strongly

nowcasts revenue surprise also hold in our extended sample and sample period.8

Put Table 2 here

It is likely that Google searches are dominated by general individuals rather than industry

professionals, which suggests that the ability of Google search to nowcast sales will be greatest

in industries that sell directly to general consumers. We therefore perform separate regressions

of equation (1) for each of the 12 Fama-French industries and report the coefficient and t-

statistics for SVI in Table 3. End-users of products and retail industry consumers are more

likely to search online about the products before making a purchase than business-to-business

and non-retail buyers so we expect that the ability of Google search volume to nowcast revenues

to be higher for retail industries. Table 3 shows that the coefficient on SVI is positive for 11 of

12 industries, and is statistically significant in six industries including retail, manufacturing,

consumer durables, chemicals and allied products, business equipment and consumer non-

We are also verify, consistent with the earlier sample of Da et al. (2012), that SVI predicts earnings surprise.
8

8
durables. These industries are referred to as strong SVI subsample in tests later in the paper. In

contrast, Google search does not appear to contain reliable information about firm revenues for

energy, telecommunication, utilities, health care and banking industries. These industries belong

to the weak SVI subsample in later tests in the paper. Overall, the empirical evidence is

consistent with the intuition that Google search contains useful information especially for firms

in industries with non-business end-users.

Put Table 3 here

Using Search Volume to Identify Firms that Manipulate Revenue Upward

The majority of restatements, audit failures, and S.E.C. enforcement actions against

companies and officers involve some revenue manipulation (citations ******). There is also

growing interest about the relevance of revenue surprises for the capital markets in recent studies.

These studies report that revenue surprises convey incremental information beyond bottom-line

earnings surprises (Ertimur, Livant, and Martikainen 2003; Ghosh, Gu, and Jain 2005; Jegadeesh

and Livnat 2006). For example, Ghosh et al. (2005) find that firms reporting sustained increases

in both earnings and revenues have higher quality earnings and larger earnings response

coefficients (ERCs) than those of firms reporting sustained increases in earnings alone.

Furthermore, firms with revenue-supported increases in earnings have both higher ERCs and

lower book value response coefficients.

The possibility of using instantaneous and publicly available sources of information such

as google search volume of firm products to nowcast revenues ahead of when they are officially

released has the potential to improve stock price efficiency of the capital markets. More pertinent

9
to the research question in this paper, we evaluate whether Google search volume can be used to

verify the veracity of reported revenues to improve financial reporting and auditing by firms.

If SVI is a good tool for aggregating information about product demand, reported sales

should correspond to the nowcasted sales suggested by SVI, unless firm managers have

manipulated sales revenues. In other words, if SVI contains useful and reliable information about

unmanaged sales, inconsistency between reported sales and SVI-predicted sales can be a

potentially useful revenue management detection tool. As a first step we develop a simple

indicator variable for whether revenue management likely has occurred. Since most accounting

fraud involves upwards manipulation (Dechow et al. 2012), we focus on identifying upward

revenue manipulation using the inconsistency between reported sales growth and SVI.

We hypothesize that when product demand suggested by SVI is sufficiently low relative

to the firm’s self-reported revenues in financial statements, then the firm is likely to have

manipulated revenues upwards. We classify firms as MUP (“Managed Upward”) if they are in

the upper tercile of sales growth or revenue surprises, Sales, and in the lower tercile of SVI.

The earnings management literature suggests that firms manipulate revenue upward by

increasing accrued revenues or reducing deferred revenues (Caylor 2010; Stubben 2010).

Therefore, we investigate whether firms in the MUP group are indeed more likely to have

increases in accounts receivables and decreases in deferred revenues using the following

regression models:

ACCREVjt = β0 + β1 MUPjt + β2 ROAjt + β3 SIZEjt + β4 BTM jt + β5 Leveragejt + ε jt (2)

DEFREVjt = β0 + β1 MUPjt + β2 ROAjt + β3 SIZEjt + β4 BTM jt + β5 Leveragejt + ε jt (3)

If the inconsistency between SVI growth and revenues growth is a good tool for detecting

10
upward revenue manipulation, we predict β1 to be positive in equation (2) and negative in

equation (3).

The results are reported in Table 4. We control for return on total assets (ROA), size,

book-to-market and leverage in Panel A, and additionally control for quarterly sales revenue

growth in Panel B. The results are similar regardless of whether quarterly sales revenue growth is

included, so we discuss results only for Panel A. The coefficient on MUP in the accrued

revenues regression is positively significant (0.016, t = 9.31), consistent with our conjecture that

firms manage revenues upwards by increasing accrued revenues. 9 For the regression of the

change in deferred revenue on MUP, we expect a negative coefficient on MUP. While the sign of

the coefficient in Column (2) is negative, it is not statistically significant. So there is no reliable

evidence that upwards manipulators manage down deferred revenues.10

To supplement the accruals management test, we examine the regression of cash flows

from operations CFO on the MUP indicator variable:

CFOjt = β0+ β1 MUPjt + β2 ROAjt + β3 SIZEjt + β4 BTM jt + β5 Leveragejt + ε jt . (4)

The results are reported in Column (3) of Table 4. The coefficient on MUP is significantly

negative, which suggests that upward revenue manipulators tend to have weak cash flows. When

combined with results of equation (2) in Column (1), MUP firms have weaker fundamentals than

the average firm. Their increases in earnings are derived more from increases in accrued

revenues, not from increases in cash flows from operations.

Previous literature suggests that where firms are unable to manage accruals, they resort to

managing real activities to manage earnings. Roychowdhury (2006) finds evidence that

9
We also examine another inconsistent case where sales growth decreased but search volume decreased, which we
refer to as MDOWN. A regression of the change in accrued revenues on MDOWN shows a significantly negative
coefficient, consistent with downward manipulators managing down accrued revenues.
10
Untabulated results show no evidence that MUP firms have lower expense accruals.

11
managers manipulate real activities to improve reported margins and avoid annual losses. We

investigate whether real earnings management may also be occurring by MUP firms to achieve

increases in revenues. Following Roychowdhury (2006), we create the variable abnormal

production costs (AB_PROD) as a measure of real earnings management activity as explained in

the Appendix. We regress AB_PROD on MUP, and other control variables:

AB_PROD jt = β0+ β1 MUPjt + β2 ROA jt + β3 SIZEjt + β4 BTM jt + β5Leverage jt + ε jt (5)

Column (4) in Table 4 reports the results. The coefficient on MUP is positive and

significant at the 1% level, indicating likely upward revenue manipulators also deploy real

earnings management activities to achieve higher revenues.

We also examine regressions (2) through (5) for subsamples of strong SVI predictive

power versus weak predictive power for sales revenue growth. Panels C and D report these

results respectively. Not surprisingly, the results are confined mostly to the strong SVI

subsample. These results provide guidance about which industries Google search data will be

most effective for in nowcasting sales and in detecting earnings management.

Overall, we find the presence of both accrual and real earnings management for likely

upward revenues manipulators. Our revenue management detection classification based on the

discrepancy in the change in search volume for the firm’s products and the change in reported

sales thus successfully distinguishes firms that manipulated accrual revenues and engaged in real

earnings management activities. The MUP measure derived from SVI information therefore is

useful in detecting upward revenue management and is a new candidate to detect revenue

management.

Put Table 4 here

12
 Next, we investigate further whether MUP can be improved as a revenue management

detection tool by combining it with a traditional measure of accrual quality. Following Dechow

and Dichev (2002), we estimate accrual quality in the prior quarter and use decile ranks AQ to

measure accrual quality, with higher ranks having lower quality. We include an interaction term

between MUP and AQ in all regressions (2) through (5):

Revenue Management Variable jt = β0+ β1 MUPjt + β2 MUP*AQjt + β3 AQjt

Β4 ROAjt+ β5 SIZEjt +β6 BTM jt + β7 Leverage jt + ε jt (6)

The results are in Table 5. Focusing on the interaction term MUP*AQ of main interest here, we

find MUP effects interact positively with poor accruals quality so that revenue management

activities are reinforced in likely upward revenues manipulators that have poor accruals quality.

Interacting with AQ allows a more powerful setting to detect earnings management. Specifically,

these firms significantly increase accrued revenues, decrease deferred revenues, increase real

earnings management activities and have poor cash flows from operations. While previously we

do not find significance for decreasing deferred revenues, the interaction term MUP*AQ is now

significantly negative, consistent with deferred revenues being manipulated down so are to

obtain increased revenues.

Put Table 5 here

Upwards Revenue Manipulation Incentives

The evidence above suggests that when demand for product information from Google

searches deviates significantly from firm-reported revenues, firms are more likely to have

engaged in revenue manipulation. As a different way of verifying whether MUP captures revenue

management, we next test whether MUP firms tend to face high incentives to manipulate

13
revenues upwards.

We use proxies for managerial incentives to manipulate earnings suggested by past

literature. We use indicator variables for the following situations: meet/beat earnings thresholds,

MBE, conduct M&A activities, M&A, raise external financing using debt or equity, ISSUE, and

engage in net insider selling, INSIDERSELL. The specific definitions for these indicator

variables and the timing of these activities are explained in the Appendix. We estimate the

following logistic regressions:

MBEjt+1= β0 + β1 MUPjt + β2 ROA jt + β3 SIZEjt + β4 BTM jt + β5 Leverage jt + ε jt (7)

M&Ajt+1= β0 + β1 MUPjt + β2 ROA jt + β3 SIZEjt + β4 BTM jt + β5 Leverage jt + ε jt (8)

ISSUEjt+1= β0 + β1 MUPjt + β2 ROA jt + β3 SIZEjt + β4 BTM jt + β5 Leverage jt + ε jt (9)

INSIDERSELLjt+1= β0 + β1 MUPjt + β2 ROA jt + β3 SIZEjt + β4 BTM jt + β5 Leveragejt + ε jt (10)

Results for these logistic regressions are reported in Table 6. We find that MUP is

associated significantly with a higher likelihood of all four earnings management incentive

settings. In future drafts, we will evaluate the economic significance of the each of the four

earnings management incentive indicator variables.

In sum, the results using indicators MBE, M&A, ISSUE, and INSIDERSELL are

consistent with MUP firms having incentives to manage revenues upwards. Most importantly,

information in SVI that is inconsistent with firm reported revenue growth successfully, as

captured by MUP, identifies situations where managers face strategic incentives to influence

investors’ perception positively. Auditors and investors can therefore use MUP to identify firms

where there is likely upward revenue manipulation and be warned to be more vigilant in valuing

such firms' financials.

Put Table 6 here

14
Predicting Revenue Restatements

Next, we test whether MUP firms are revenue manipulators directly by estimating their

likelihood of revenue restatements. Earnings restatements (irregularities) are clear indicators of

previous earnings manipulation, so restatements are especially pertinent for test the efficacy of

our MUP classification. We therefore run the following logistic regression:

Restate_Revjt = β0 + β1 MUPjt + + β3 ROA jt +β4 SIZEjt + β5 BTM jt +

Β6 Leverage jt + β7 AB_ACC jt + ε jt (11)

We evaluate restatements of revenues for the current period, which is the same period as the

MUP classification period. Table 7 shows that the coefficient of MUP is positive and significant

at the 5% level. Upward revenue manipulators are more likely to restate their revenues during the

current period. To measure the economic effect of MUP on the likelihood of revenue

restatement, we calculate the marginal effect of the probability of restating revenues when MUP

changes from zero to one holding all other independent variables at their means. We find that

when MUP changes from zero to one increases the odds of restatement by XX percent. With

regards to the control variables, we find that larger firms and value firms are more likely to

restate earnings. Larger firms are more likely to attract scrutiny from regulators (Lee, Li, and Yue

2006). In sum, our results show that MUP firms are more likely to restate earnings.

In sum, the results verify that our revenue management classification using the

inconsistency of the change in SVI and reported revenue growth can predict earnings

restatements. Therefore SVI contains information useful for revenue management detection.

Put Table 7 here

Conclusion

15
 In this paper, we use Google search volume to nowcast or ‘forecast the present’ revenue

surprise, and to detect revenue management activity. We find that changes in the Google search

volume index for the name of firm products or brands available on Google Trends websites

nowcast growth in sales revenues, especially in industries with retail end-users. Furthermore, the

inconsistency between the quarterly change in Google search volume index and sales revenue

growth as reported by the firm can be used as a new earnings management detection tool to

identify firms that are likely upwards revenue manipulators MUP.

We find that MUP firms report higher change in accrued revenues, abnormal production

(a measure of real earnings management) and lower cash flows from operation, after controlling

for the lagged change in sales and other earnings management determinants. These effects are

stronger in firms with lower accrual quality. MUP firms are also more likely to meet/beat

analysts’ forecasts, conduct M&A activities, raise external financing using debt or equity, and

engage in more insider trading selling in the open window after the earnings announcement date

when insiders are generally allowed to trade the firm’s own stock. Finally, we find that MUP

firms are associated with a higher likelihood of revenue restatements.

In summary, we find that Google searches of company products are useful for nowcasting

sales revenues ahead of financial statement reporting, and can serve as an method for external

parties to audit firm self-reported revenues and balance sheet account values, and to detect

earnings management almost instantaneously. This latter finding suggests that auditors and

investors can benefit from data sources external to the firm that are related to firm transactions

such as Google searches for a firm’s products to assess the veracity of reported revenues.

In closing, we encourage our academic colleagues to investigate external sources of

information about firm transactions and to debate the merits and challenges of nowcasting and

16
auditing financial statement information. There may also be a role for regulatory bodies to

encourage and for new businesses to offer new ways of identifying and aggregating data about

firm transactions so that external stakeholders to the firm can have independent means to audit

the veracity of firm financial statements. This would have the advantage of reducing financial

reporting fraud and increasing the informational efficiency of the capital markets.

17
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 Appendix: Variable Definitions

Variable Name Definition

SVI Log change of a firm’s SVI, calculated as log SVI of current quarter minus log
SVI of previous quarter ;

Size The natural log of the market capitalization ([PRCCQ]t*[CSHOQ]t) (in

millions);

MTB The nature log of market-to-book ratio, calculated as the market value of equity
([PRCCQ]t*[CSHOQ]t) divided by the book value of equity [CEQQ]t at the
end of the most recent fiscal quarter for which the data are available;

Leverage Total liability divided by the book value of equity ([ATQ]t-[CEQQ]t)/[CEQQ]t;

Sales Change in firm sales ([SALEQ]t-[SALEQ]t-1) divided by previous quarter sales

[SALEQ]t-1;

Sale One quarter lagged scaled change in sales, calculated as ([SALEQ] t-1-[SALEQ]t-
2) / [SALEQ]t-2);

Sale Four quarter lagged scaled change in sales, calculated as ([SALEQ]t-4-

[SALEQ]t-5) / [SALEQ]t-5);

ROA Return on total asset, calculated as the net income before extraordinary item
[IBQ]t divided by previous quarter total asset [ATQ]t-1;

CFO Cash flows from operations [OANCY]t divided by previous quarter’s total asset
[ATQ]t-1;

ACCREV Change in accrued revenue divided by previous quarter’s total asset;

DEFREV Change in total deferred revenue divided previous quarter’s total asset;

AB_PROD Abnormal production costs are measured as deviations from the predicted
values from the corresponding industry-year regression: PRODt /At-1 = a0+ β0
(1/At-1)+ β1 (St/At-1)+ β2 (∆St/At-1)+ β3 (∆St-1/At-1)+ εt , where PROD is
production costs, the sum of cost of goods sold and change in inventory; S is
sales; and A is total assets;

AQ Decile ranks of lagged one quarter accruals quality. Accrual quality is

measured as the standard deviation of working capital residuals from the
following regression: ∆WC jt = α+ β0 CFOt-1 + β1 CFOt + β2 CFOt+1 + εt ;

MBE An indicator variable which equals one if the change in net income from year t-
1 to t, scaled by the beginning market value of equity is nonnegative, but less

21
 than 0.005, and zero otherwise;

M&At+1 An indicator variable which equals one if the amount of acquisition (AQC) in
one year after an earnings press release is greater than 10 percent of lagged
total assets, and zero otherwise.

ISSUEt+1 An indicator variable which equals one when the sale of common and preferred
stock (SSTK) or debt (******) in one year after an earnings announcement is
greater than 10 percent of lagged total assets, and zero otherwise.

INSIDERSELL An indicator variable which equals one for insider net sale transactions greater
than zero during the period (+2,+30) after firms’ earnings announcements
*square brackets represent COMPUSTAT item code.

22
 Table 1 Summary Statistics
Panel A: Descriptive Statistics
Variable Mean SD p25 p50 p75
SVI 0.016 0.294 -0.096 0.003 0.101
Size 8.049 1.978 6.643 8.101 9.521
MTB 2.927 4.675 1.280 2.082 3.444
Leverage 3.055 6.320 0.711 1.420 3.221
Sales 0.121 1.127 -0.511 0.153 0.822
Earn -0.034 1.653 -0.298 -0.008 0.243
ROA 0.011 0.029 0.002 0.010 0.022
CFO 0.051 0.074 0.010 0.040 0.086
Ab_Prod -0.021 0.087 -0.051 -0.011 0.013

Panel B Pearson Correlation

(1) (2) (3) (4) (5) (6) (7) (8) (9)
(1) SVI
(2) Size -0.007
(3) MTB -0.002 0.096
(4) Leverage 0.000 0.075 0.188
(5) Sales 0.198 0.044 0.022 -0.014
(6) Earn 0.020 0.077 0.024 -0.009 0.188
(7) ROA 0.081 0.230 0.171 -0.150 0.221 0.115
(8) CFO 0.020 0.137 0.127 -0.138 0.097 0.056 0.450
(9) Ab_Prod -0.019 0.018 -0.128 0.086 -0.028 -0.018 -0.162 -0.225
Notes: This table presents summary statistics of the main variables. Panel A reports the mean, median, standard deviation, the first and the third
quartile of the main variables. Panel B reports the Pearson correlation coefficients of the main variables. Bold numbers indicate significance at less
than the 5% level. All variables are as defined in Appendix.

23
 Table 2 Regression of Revenue Surprises on Change in Google Search Volume
Index

(1) (2) (3)

VARIABLES Sale Sale Sale
SVI 0.72*** 0.70*** 0.33***
(8.45) (8.93) (7.91)
Sale1 -0.28*** -0.15***
(-13.98) (-11.86)
Sale 0.55***
(25.39)
Size 0.02*** 0.03*** 0.01
(3.88) (4.41) (1.32)
MTB 0.14*** 0.18*** 0.11***
(3.40) (4.13) (3.08)
Leverage -0.00* -0.00* -0.00
(-1.66) (-1.94) (-0.96)
Time FE Y Y Y
# Obs. 13,405 13,332 12,327
2
Adj. R 0.07 0.15 0.41
Notes: This table reports the results of the regression of revenue surprises on SVI and other
control variables. The dependent variable is Sale, quarterly change in firm sales deflated by
previous quarter sales. The key independent variable, SVI, is log change of a firm’s SVI,
calculated as log SVI of current quarter minus log SVI of previous quarter. Sale1 and Sale
are one quarter and four quarter lagged scaled change in sales respectively. All other variables are
as defined in Appendix. T-statistics based on two-way clustering at both the firm level and the
quarter level are reported in parentheses. *** indicates p < 0.01; ** p < 0.05; * p < 0.1.

24
 Table 3 Revenue Predictability of Change in Google Search Volume Index by
Industry

Industries Coefficient t-stat

Consumer Non-Durables 0.23 (0.90)
Consumer Durables 1.59** (2.49)
Manufacturing 0.47** (2.58)
Energy 0.3 (1.08)
Chemicals and Allied Products 0.69*** (3.34)
Business Equipment 0.43* (1.90)
Telecommunication -0.14 (-0.61)
Utilities 0.46 (1.45)
Retail 1.92*** (6.59)
Health Care 0.18 (1.10)
Banking 0.19* (1.82)
Others 0.64*** (3.41)
Notes: This table reports the regression coefficients and t-stats of SVI for each of the twelve
Fama and French industries: Salejt = β0+ β1 SVIjt + β2 SIZEjt + β3 BTMjt + β4 Leveragejt + εjt.
The dependent variable Sales is the quarterly change in firm sales deflated by previous quarter
sales. SVI is log change of a firm’s SVI, calculated as log SVI of the current quarter minus log
SVI of the previous quarter. All other variables are as defined in Appendix. T-statistics are based
on two-way clustering at both the firm level and the quarter level. *** indicates p < 0.01; ** p <
0.05; * p < 0.1.

25
 Table 4 Regression of Quantitative Earnings Management Variables on MUP,
Indicator of Upwards Earnings Management
Panel A Without Including Sales Change as an Additional Control

(1) (2) (3) (4)

ACCREV DEFREV CFO AB_PROD
MUP 0.016*** -0.000 -0.015*** 0.010***
(9.31) (-0.32) (-3.71) (3.01)
ROA 0.103*** -0.012* 1.020*** -0.385***
(4.13) (-1.66) (11.79) (-4.42)
Size -0.000 0.000 0.002** 0.003**
(-0.35) (1.49) (2.45) (2.29)
MTB -0.001 0.003*** 0.040*** -0.050***
(-0.59) (4.06) (4.15) (-4.69)
Leverage 0.000** -0.000*** -0.002*** 0.002***
(2.34) (-3.07) (-5.62) (6.02)
Time FE Y Y Y Y
# Obs. 14,658 10,755 14,902 14,458
Adj. R2 0.05 0.02 0.31 0.07

Panel B Including Sales Change as an Additional Control

(1) (2) (3) (4)

AccRev DefRev CFO AB_PROD
MUP 0.004** -0.001 -0.009** 0.011***
(2.38) (-0.97) (-2.40) (3.70)
Sales 0.057*** 0.002 -0.027*** -0.004
(9.72) (1.49) (-2.80) (-0.70)
ROA 0.008 -0.015** 1.054*** -0.393***
(0.50) (-2.03) (12.09) (-4.39)
Size 0.000** 0.000 0.002** 0.003**
(2.26) (1.63) (2.29) (2.31)
MB 0.000 0.003*** 0.039*** -0.050***
(0.37) (4.07) (4.12) (-4.67)
Leverage 0.000 -0.000*** -0.002*** 0.002***
(1.15) (-3.26) (-5.51) (6.01)
Time FE Y Y Y Y
# Obs. 14,658 10,755 14,902 14,458
Adj. R2 0.22 0.02 0.32 0.07

26
Panel C Including Sales Change as an Additional Control on subsample with strong
SVI
(1) (2) (3) (4)
AccRev DefRev CFO AB_PROD
MUP 0.006*** -0.001 -0.008* 0.012***
(2.68) (-0.58) (-1.82) (2.82)
Sales 0.048*** 0.002 -0.012 -0.007
(7.70) (1.32) (-1.12) (-0.96)
ROA -0.001 -0.020* 1.052*** -0.325***
(-0.09) (-1.90) (10.47) (-3.41)
Size 0.000*** 0.000 0.002 0.004***
(2.99) (1.45) (1.49) (2.99)
MB 0.001 0.003*** 0.044*** -0.041***
(0.80) (3.78) (3.84) (-3.42)
Leverage 0.000 -0.000*** -0.002*** 0.001***
(1.21) (-2.98) (-5.48) (4.09)
Time FE Y Y Y Y
# Obs. 11,370 8,401 11,607 11,261
2
Adj. R 0.16 0.02 0.30 0.06

Panel D Including Sales Change as an Additional Control on subsample with weak

SVI

(1) (2) (3) (4)

ACCRev DEFRev CFO AB_PROD
MUP -0.003 -0.001 -0.007 0.017*
(-1.02) (-1.50) (-1.02) (1.89)
Sale 0.086*** 0.001 -0.072*** 0.001
(8.89) (1.40) (-5.09) (0.10)
ROA 0.035 -0.008 1.045*** -0.576***
(1.31) (-0.76) (7.82) (-3.15)
Size 0.000 0.000 0.003* 0.002
(0.89) (1.26) (1.92) (0.60)
MB 0.001 0.002** 0.017 -0.102***
(0.47) (2.11) (1.10) (-4.83)
Leverage -0.000 -0.000* -0.001 0.006***
(-0.92) (-1.83) (-1.07) (5.94)
Time FE Y Y Y Y
# Obs. 3,288 2,354 3,295 3,197
Adj. R2 0.44 0.02 0.42 0.16
Notes: These tables report the results of the regression of quantitative earnings management
variables on MUP, an upwards earnings management indicator, and other control variables. In
Column (1), the dependent variable ACCREV is the change in accrued revenues divided by

27
previous quarter total assets. In Column (2), the dependent variable DEFREV is the change in
total deferred revenue divided by previous quarter total assets. In Column (3), the dependent
variable CFO is the cash flows from operations divided by previous quarter’s total assets. In
Column (4), the dependent variable AB_PROD is the abnormal production costs, which are
measured as deviations from the predicted values from the corresponding industry-year
regression: PRODt /At-1 = a0+ β0 (1/At-1)+ β1 (St/At-1)+ β2 (∆St/At-1)+ β3 (∆St-1/At-1)+ εt , where
PROD is production costs, the sum of cost of goods sold and change in inventory; S is sales; and
A is total assets. MUP is an indicator variable that is set to one if the firm is a likely upward
revenue manipulator, defined to be firms belonging in the bottom SVI tercile rank and top
Sales tercile rank. SVI and Sales are defined earlier in Table 2 notes. Quarter fixed effects
are included in all regressions. Strong SVI sample includes all industries with statistically
significant SVI coefficients in industry regressions of Sales on SVI as reported in Table 3; in
other words, Strong SVI sample includes industries where SVI changes strongly nowcasts current
period revenue growth. Weak SVI sample includes all other industries. All other variables are as
defined in the Appendix. T-statistics based on two-way clustering at both firm and quarter levels
are reported in parentheses. *** indicates p < 0.01; ** p < 0.05; * p < 0.1.

28
Table 5 Regression of Quantitative Earnings Management Variables on Interaction
of Accruals Quality and MUP, Upwards Earnings Management Indicator
(1) (2) (3) (4)
VARIABLES AccRev DefRev CFO AB_PROD
MUP 0.012*** 0.001 -0.006** 0.000
(6.03) (1.61) (-2.55) (0.02)
MUPAQ 0.010*** -0.002** -0.017*** 0.021**
(2.73) (-2.50) (-2.74) (2.29)
AQ -0.000 0.000 0.006*** -0.011***
(-0.93) (1.50) (3.06) (-3.66)
ROA 0.104*** -0.010 1.040*** -0.437***
(4.03) (-1.30) (11.80) (-4.97)
MV 0.000 0.000* 0.003*** 0.003*
(0.05) (1.79) (2.75) (1.76)
BTM -0.001 0.002*** 0.038*** -0.043***
(-0.61) (4.08) (3.77) (-4.41)
LEV 0.000* -0.000*** -0.002*** 0.002***
(1.93) (-2.72) (-5.01) (5.98)
Observations 14,037 10,335 14,285 13,927
Adj. R-squared 0.04 0.02 0.32 0.07

Notes: These tables report the results of the regression of quantitative earnings management
variables on MUP, the interaction variable MUPRAQ, and other control variables. In Column (1),
the dependent variable is AccRev, Change in accrued revenue divided by previous quarter total
asset. In Column (2), the dependent variable is DefRev, change in total deferred revenue divided
previous quarter total asset. In Column (3), the dependent variable is CFO, cash flows from
operations divided by previous quarter’s total asset. In Column (4), the dependent variable is
AB_PROD, abnormal production costs, which are measured as deviations from the predicted
values from the corresponding industry-year regression: PRODt /At-1 = a0+ β0 (1/At-1)+ β1 (St/At-
1)+ β2 (∆St/At-1)+ β3 (∆St-1/At-1)+ εt , where PROD is production costs, the sum of cost of goods
sold and change in inventory; S is sales; and A is total assets. MUP is an indicator variable that is
set to one if the firm is in the suspicious upward earnings management group, which consists of
firms belonging in the bottom SVI tercile rank and top Salestercile rank. AQ is the rank of
accrual quality, measured as the standard deviation of working capital residual from the following
regression: ∆WCjt = α+ β0 CFOt-1 + β1 CFOt + β2 CFOt+1 + εt. MUPAQ is the interaction term of
MUP and rank of AQ. All other variables are as defined in Appendix. t-statistics based on two-
way clustering at both the firm level and the quarter level are reported in parentheses. ***
indicates p < 0.01; ** p < 0.05; * p < 0.1.

29
 Table 6 Regression of Capital Market Incentives on MUP, Upwards Earnings
Management Indicator

(1) (2) (3) (4)

VARIABLES MBE M&A ISSUE INSIDERSELL
MUP 0.272*** 0.954*** 0.274* 0.263**
(2.74) (5.81) (1.92) (2.54)
ROA 6.337*** 3.747** -5.722*** 9.965***
(4.56) (2.00) (-4.22) (5.53)
Size 0.173*** -0.076** -0.189*** 0.265***
(10.20) (-2.08) (-5.58) (9.07)
MB -0.811*** 0.759*** 0.382* 0.993***
(-7.32) (4.27) (1.84) (4.40)
Leverage 0.036*** -0.089*** 0.014 -0.045***
(6.82) (-3.07) (1.47) (-4.19)
Time FE Y Y Y Y
Observations 14,956 14,551 15,004 10120
Pse. R2 0.0452 0.0295 0.0339 0.1141
Notes: This table reports the results of logistic regression of capital market incentives on MUP
and other control variables. In Column (1), the dependent variable is MBE, an indicator variable
for whether current earnings just meet or beat prior earnings benchmark. In Column (2), the
dependent variable is M&At+1, an indicator variable for M&A activities within one year after an
earnings announcement. In Column (3), the dependent variable is ISSUEt+1, an indicator variable
for equity issuance activities within one year after an earnings press release. In Column (4), the
dependent variable is INSIDER, an indicator variable for insider net sale transactions during the
period (+2,+30) after firms’ earnings announcements. MUP is an indicator variable that is set to
one if the firm is in the suspicious upward earnings management group, which consists of firms
belonging in the bottom SVI tercile rank and top Salestercile rank. All other variables are as
defined in Appendix. Standard errors are based on two-way clustering at both the firm level and
the quarter level. z-statistics are reported in parentheses. *** indicates p < 0.01; ** p < 0.05; * p <
0.1.

30
 Table 7 Logistic Regression of Revenue Restatement on MUP, Upwards Earnings
Management Indicator

(1)
VARIABLES Restate_Rev
MUP 0.668**
(2.30)
MDOWN -0.366
(-0.94)
ROA -0.697
(-0.18)
SIZE 0.016
(0.21)
BTM -0.028
(-0.03)
Leverage 0.002
(0.08)
AB_ACC 0.013**
(2.11)
Time FE Y
Observations 6,772
Pse. R2 0.134
Notes: This table shows the logistic regression result of revenue restatements on MUP and other
control variables. The dependent variable is Restate_Rev, set to 1 when firms restate their
earnings in the same period that they are classified into MUP. MUP is an indicator variable that is
set to one if the firm is in the suspicious upward earnings management group, which consists of
firms belonging in the bottom SVI tercile rank and top Sales tercile rank. All other variables
are as defined in Appendix. Standard errors are based on two-way clustering at both the firm level
and the quarter level. z-statistics are reported in parentheses. *** indicates p < 0.01; ** p < 0.05;
* p < 0.1.

31