The Revenue Halo Effect: Perceptions of Companies’ Spending and Saving

Overview: In the paper titled, “The Revenue Halo Effect: How Revenues and Expenses Asymmetrically Affect Perceptions of Profitability,” NYU Stern Professor Maria Giulia Trupia and co-author Franklin Shaddy (UCLA Anderson) evaluate how people perceive a company’s changes to revenues and expenses, and what inferences they draw as a result.

Why Study This Now: Companies are constantly navigating methods of spending and saving across their organizations, a tension that has become increasingly relevant due to the rapid adoption of AI. Businesses are now considering how to use these impactful technologies to create new sources of revenue as well as reduce costs through improved efficiencies. Beyond any realized financial consequences, the way these methods are framed and communicated to the public can influence how stakeholders evaluate the company itself.

What the Authors Found: Across nine experiments (approximately 6000 participants) and an archival analysis of 13 million financial news articles, the researchers found that:
 

• Increases in revenues, relative to equivalent decreases in expenses, lead to more positive perceptions of profitability (short- and long-term) in addition to more favorable impressions of a company’s financial strength, performance, potential, and trajectory – a reaction the researchers call the Revenue Halo Effect
• This halo can also be seen when looking at individuals: managers who propose ideas to increase revenues (vs. decreasing expenses) are viewed as more competent, and consultants who develop similar strategies are more likely to be rehired
• In part, the effect is driven by the belief that strategies for increasing revenues are more innovative than for decreasing expenses. When experiment participants were told the gain resulted from a routine accounting correction (and not innovation), the effect disappeared and even reversed

What Does This Change: The research is relevant for business leaders, managers, investors, and companies at large. For example: since cost-cutting announcements often draw backlash while revenue increases are better received, companies should highlight the innovation such initiatives require, or reframe them as unlocking growth (e.g., pairing “a 15% reduction in operational costs” with the implication that it “will enable 15% more investment in revenue growth initiatives”).

Key insight: “In this research, we focus on perceptions of profitability: how people subjectively evaluate changes to revenues and expenses and what inferences they draw as a result,” say the authors. “Our work suggests profitability may be as much a psychological construct as a financial one.”

This research is forthcoming in Organizational Behavior and Human Decision Processes.