The revenue halo effect: How revenues and expenses asymmetrically affect perceptions of profitability

There are two primary ways to boost profits: increase revenues or decrease expenses. For example, whether a company increases revenues by $1 million or decreases expenses by $1 million, its profits will increase by $1 million (all else equal). But how do people subjectively evaluate such changes to revenues and expenses, and what inferences do they draw as a result? Across nine experiments ( N = 6045), an archival data analysis, and four supplemental studies, we document a robust “revenue halo” effect: increases in revenues, relative to equivalent decreases in expenses, lead to more positive perceptions of profitability, in both the short and long run, and result in more favorable overall impressions of financial strength, performance, potential, and trajectory. Consequently, managers who propose ideas for increasing revenues (vs. decreasing expenses) are viewed as more competent; consultants who develop such strategies are more likely to be rehired; and companies that report higher revenues are more attractive to investors. We furthermore propose that the revenue halo effect can be explained, in part, by the belief that strategies for increasing revenues are more innovative than strategies for decreasing expenses. Finally, to underscore the real-world relevance of our account, we analyze approximately 13 million financial news articles, finding that when firms reported increased revenues (vs. decreased expenses), they subsequently rose in Fortune 's “World's Most Admired Companies” rankings (the following year). This research identifies a novel asymmetry in judgments of organizational performance, with implications for managerial decision-making, corporate communication, and capital allocation.